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NO.  94-821 52 


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Author: 

Church,  Alexander 
Hamilton 

Title: 

The  proper  distribution  of 
expense  burden 

Place: 

New  York 

Date: 

1913 


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LIBRARY 


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INDUSTRIAL  MANAGEMENT  LIBRARY 


THE 

PROPER  DISTRIBUTION 

OP 

EXPENSE  BURDEN 


A.  HAMILTON  CHURCH 


NEW  YORK 
THE  ENGINEERING  MAGAZINE  CO. 

1916 


Na 


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Copyright,  1006 
By  JOHN  R.  DUNLAP 

Copyright,  1912 
By  THE  ENGINEERING  MAGAZINE  CO. 


WAVERLY  PRESS 
Baltwou.  U.  &  A. 


• 

J- 


PREFACE. 

The  contents  of  this  book  appeared  originally 
in  The  Engineering  Magazine  as  a  series  of 
articles.  These  at  once  took  rank  as  a  standard 
reference  work  on  one  of  the  most  difficult  ques- 
tions of  cost-finding;  and  a  steady  and  continued 
demand  for  the  numbers  of  the  Magazine  (now 
out  of  print)  in  which  they  were  contained  has 
led  to  the  republishing  of  the  entire  group,  here 
revised  and  adapted  for  presentation  in  volume 
form. 

The  accurate  distribution  of  general  expense 
is  admittedly  one  of  the  most  perplexing,  but  yet 
one  of  the  most  important,  problems  with  which 
the  manufacturer  must  deal.  The  simple  but 
thorough  analysis  conducted  in  this  volume,  and 
the  clear,  conmion-sense  demonstration  pre- 
sented, will  furnish  a  reUable  guide  to  the  solu- 
tion of  highly  complex  conditions  in  factory 
accounting. 

Much  of  the  published  literature  in  this  field 
has  been  purely  descriptive,  and  has  gone  little 
farther  than  to  present  specialized  adaptations 
employed  in  certain  individual  shops,  and  per- 


PREFACE 


haps  not  well  suited  to  any  but  the  one  estab- 
lishment for  which  each  was  designed.  Mr. 
Church's  material  is  of  far  greater  value.  He 
is  not  concerned  with  the  size,  ruling,  or  print- 
ing of  forms  and  cards — matters  which  should 
be  designed  by  the  accountant  to  fulfill  his 
special  piupose.  He  goes  to  the  root  ideas  of 
cost-finding,  and  lays  down  broad  principles 
by  which  safe  and  reliable  figures  may  be 
obtained  for  machine,  piece,  and  job  costs. 
These  principles  will  properly  distribute  all 
expenses  of  manufacture,  marketing,  and  man- 
agement, so  that  the  truth  may  be  known  as  to 
the  profit  or  loss  of  any  line  of  product,  and 
changes  in  manufacturing  cost  from  time  to 
time  may  be  instantly  detected  and  the  cause 
discovered.  With  increasing  competition  and 
increasing  complexity  of  manufactured  output 
this  knowledge  is  indispensable. 

The  Editor. 


CONTENTS. 

Chapter  I.    Interlocking  General  Charqes  with 
Piece  Costs 

The  Growth  of  Cost  Accounting — Competition 
Makes  Accurate  Knowledge  Urgent — The  Expense 
of  Accurate  Cost-Finding  Justified — Its  Complexity 
Varies  with  the  Business — Its  Advantages  Demon- 
strated— Direct  and  Indirect  Wages — Job  Costs  the 
Starting  Point — The  Elements  Composing  Job  Cost 
— ^Prime  Cost,  Shop  Cost,  Inclusive  Cost,  and  Selling 
Price — The  Machine  Rate — Expense  Apportionment 
often  the  Most  Important  Component — Its  Impor- 
tance Demonstrated 9 


Chapter  II.    Distributing  Expense  to  Individual 
Jobs 

What  Goes  into  Indirect  Expense — Methods  of 
Apportioning  Indirect  Expense  to  Work — The  Per- 
centage-on- Wages  Method — Its  Fallacy  Pointed  Out 
— Conditions  under  which  it  may  be  Safely  Used — 
The  Hourly-Burden  Plan — Its  Principle  Illustrated 
— Its  Results  Differ  from  the  Preceding — Examples 
— Important  Features  and  Weaknesses  Pointed  Out 
— ^The  Machine-Rate  Method — Its  Antiquity — Gen- 
erally Unsuited  to  Modem  Conditions — Reasons  for 
Its  Unsuitability  Indicated — General  R(Ssum6 — The 
Elements  of  an  Ideal  System — The  Shop  Considered 
as  an  Assemblage  of  "Production  Centres" — How 
this  Clears  Up  the  Problem 31 


6 


CONTENTS 


CONTENTS 


Chapter  III.    The  Scientific  Machine  Rate  and  the 
Supplementary  Rate 

Essential  Differences  from  the  Old  Machine-Rate 
Plan — Examples  Worked  Out — The  Distribution  of 
Charges  to  Production  Centres  Explained — What 
Constitutes  the  "Supplementary  Rate" — The  Effect 
of  Idle  Machinery  Exhibited — Full  Outline  of  the 
Plan  Revealed — Its  Working  Shown  in  Typical  Cases 
— The  Principles  Restated 55 

Chapter  IV.    Classification  and  Dissection  of  Shop 
Charges 

The  Fallacy  of  General  Averaging  Pointed  Out — 
Discriminating  Apportionment  of  Expense  Among 
Production  Centres  is  Necessary — It  is  not  Difficult 
— The  Various  Items  Discussed — Floor  Space,  Light- 
ing, Power,  Machinery,  Supervision — The  Cost  of 
Tools — Wages  of  General  Foremen — Depreciation — 
Repairs — Periodical  Readjustment  by  Latest  Rec- 
ords— The  Workings  of  the  Supplementary  Rate 
Demonstrated — Their  Correctness  Proved 77 


Chapter  VI.    Appobtionicbnt  of  Office  and  Sbllinq 
Expense 

Items  Entering  into  Expense  Burden  after  Pro- 
duction is  Complete — ^The  Difficulties  of  Appor- 
tioning Them  to  the  Product — General  Averages 
Misleading— Possibilities  of  Approximately  Correct 
Distribution  of  Office  and  Selling  Cost— Basis  for 
Distribution  Commonly  Used — Examples  of  Clas- 
sification of  Product  for  Distribution  of  General 
Expense— Tabulation  of  Items  and  Their  Apportion- 
ment to  Various  Classes  of  Product — Value  of  the 
Results  Secured— The  Features  and  Effects  of  the 
Proposed  System  Reviewed 123 


Chapter  V.    Mass  Production  and  the  New  Machine 
Rate 

The  Method  Applied  to  Automatic,  Semi-Auto- 
matic, and  Repetitive  Work — The  Special  Problems 
Which  Appear  Here — How  Idle  Time  is  Adjusted — 
Apportionment  of  Idle  Time  Charged  between  Indi- 
vidual Jobs  and  the  Supplementary  Rate — Adapta- 
tion to  Mixed  Shops — Differences  between  the  Old 
and  the  New  Methods  Summarized — Correct  Figures 
and  Examples  from  Actual  Shop  Work — The  Ac- 
counts Presented,  Analyzed,  and  Explained 101 


II 


Ill 


II! 


Ill 


INTERLOCKING  GENERAL  CHARGES 
WITH  PIECE  COSTS. 


THE  PROPER  DISTRIBUTION  OF 
EXPENSE  BURDEN. 


Chapter  I. 

INTERLOCKING  GENERAL  CHARGES  WITH 

PIECE  COSTS. 

IXTRITING  no  less  than  sixty-eight  years 
^  ^  ago,  Charles  Babbage  said  :*  "  The  great 
competition  introduced  by  machinery,  and  the 
application  of  the  principle  of  the  sub-divi- 
sion of  labor,  render  it  continually  necessary 
for  each  producer  to  be  on  the  watch,  to  dis- 
cover improved  methods  by  which  the  cost  of 
each  article  can  be  reduced,  and  with  this 
view,  it  is  of  great  importance  to  know  the 
precise  expense  of  every  process,  as  well  as  of 
the  wear  and  tear  of  machinery  which  is  due 
to  it."  And  in  a  subsequent  chapter  dealing 
with  the  "causes  and  consequences  of  large 
factories,"  he  points  out  that  in  reference  to 
any  particular  manufacture  there  will  be  a 

•  Economy  of  Manufacture,  by  C.  Babbage,  M.A.,  Lon- 
don, Knight,  1832. 

11 


12        THE  DISTRIBUTION  OF  EXPENSE  BURDEN 


GENERAL  CHARGES  AND  PIECE  COSTS 


13 


• 


certain  minimum  proportion  of  indirect  expen- 
diture for  supervision,  lighting,  clerical  work, 
passage  of  materials  from  process  to  process, 
repairing,  etc.,  which  cannot  be  exceeded  in 
any  similar  factory  without  a  less  efficient  pro- 
duction resulting. 

This  is  probably  the  earliest  reference  made 
by  any  pubhc  writer  either  to  costs  or  estab- 
lishment charges.  Yet  notwithstanding  that 
the  importance  of  such  matters  was  realized 
by  Babbage  so  early  in  the  development  of 
manufacturing  industries,  the  lesson  for  vari- 
ous reasons  fell  upon  deaf  ears,  and  it  is  only 
today,  when  the  principle  of  competition  has 
attained  its  full  growth  and  has  become  a 
matter  of  life  and  death,  that  the  commercial 
organization  of  manufactories  is  felt  to  have 
become  a  matter  of  prime  urgency. 

In  the  present  book  an  attempt  will  be  made 
to  thresh  out  the  question  of  establishment 
expenditure  and  its  interconnection  with  costs, 
not  merely  of  the  output  as  a  whole,  but  of  the 
piece  and  process  in  detail.  To  many  persons 
who  have  not  given  sufficient  attention  to  the 
matter,  such  a  problem  will  present  itself,  in 
the  first  place  as  hopeless,  and  in  the  second  as 
superfluous.  Show  a  person  of  this  type  how 
he  can  reduce  his  pay  roll  by  $1,000  a  year. 


and  he  will  listen  with  respect.  Hint  to  him 
that  knowledge  is  power,  and  that  absence  of 
knowledge  is  weakness,  and  he  will  be  alarmed, 
not  at  his  own  ignorance,  but  at  the  prospect 
of  what  he  terms  "unreproductive  expenditure." 
A  firm  that  will  spend  its  money  freely  on  plate 
glass  and  mahogany  in  its  offices,  often  shrinks 
from  the  expense  of  getting  to  know  what  is 
going  on  in  its  shops. 

Why  is  this?  The  true  answer  probably  is 
that  one  is  a  familiar  and  conventional  item  of 
expenditure,  and  the  other  is  "something  new." 
One  is  an  obvious  and  tangible  asset,  the  other 
an  easy  subject  of  criticism  for  the  irate  share- 
holder who  remarks  "they  have  nothing  of 
this  kind  of  thing  at  so  and  so's."  To  spend 
money  today  for  the  sake  of  saving  a  much 
larger  amount  at  some  future  period,  even 
where  the  certainty  is  admitted,  demands  some 
moral  courage;  but  to  expend  money  for  the 
purpose  of  raising  efficiency,  detecting  waste, 
and  preventing  loss,  demands  strong  judgment 
and  confidence  as  weU.  Hence  innovations  in 
th|s  department  are  made  much  more  slowly 
than  changes  in  the  shops. 

The  difficulty  of  deaUng  adequately  with 
establishment  charges  in  their  relation  to  piece 
and  process  is  usually  in  prof>ortion  to  the  heter- 


14        THE  DISTRIBUTION  Of  EXPENSE  BURDEN 


GENERAL  CHARGES  AND   PIECE  COSTS 


15 


ogeneity  of  the  business  carried  on.  In  highly 
speciahzed  businesses  working  on  modern  lines,  it 
probably  costs  no  more  to  maintain  a  close  inter- 
connection of  charges  and  costs  than  to  take 
out  prime  cost  in  any  form.  But  in  older  places, 
where  all  sorts  of  things  from  steam  engines  to 
twist  drills  are  included  in  one  output,  the  diffi- 
culty is  much  greater,  but  on  the  other  hand  the 
need  for  and  utility  of  such  a  connection  is 
greater  in  equal  degree. 

At  what  stage  in  the  growth  of  a  business 
from  very  small  beginnings  a  fully  developed 
cost  and  expenditure  system  becomes  a  neces- 
sity is  difficult  to  say.  But  that  it  should  be 
introduced  as  early  as  possible  is  desirable  for 
reasons  imconnected  with  its  immediate  use. 
In  a  small  works  under  the  personal  super- 
vision of  the  proprietor,  who  is  able  to  give  so 
much  of  his  time  to  the  affairs  of  the  shop  that 
he  is  fully  conversant  with  the  progress  of  work 
through  it  day  by  day,  a  cost  sjrstem  of  any 
kind  has  but  little  present  value.  But  as  it  is 
in  the  nature  of  new  businesses  to  expand  into 
large  ones,  and  that  sometimes  with  consider- 
able rapidity,  with  a  consequent  loss  of  grip  of 
detail  on  the  part  of  the  proprietor,  it  becomes 
very  important  that  records  shall  be  available 
representing  what  was  accomplished  in  the  shop 


at  the  most  vigorous  period  of  its  life,  namely, 
when  the  need  for  expansion  was  becoming  felt. 

It  is  not  uncommon  experience  that  expan- 
sions do  not  always  produce  the  satisfactory 
effects  anticipated.  During  changes  of  this 
kind  something  has  evaporated,  it  is  not  known 
what,  but  the  absence  of  which  is  recognized 
keenly  enough  in  its  practical  effects.  The  real 
element  varies,  of  course.  It  may  be  a  less 
intense  watch  on  the  part  of  the  proprietor, 
or  it  may  be,  with  still  greater  probability,  a 
dislocation  of  the  previously  existing  relation- 
ship between  work  and  the  incidence  of  expen- 
diture, which  again  may  be  due  to  a  variety  of 
causes  that  must  needs  be  recognized  before 
they  are  remedied. 

We  have  not,  however,  to  consider  the  case 
of  the  private  proprietor  alone.  Probably  to- 
day the  larger  number  of  new  businesses  are 
joint-stock  concerns  from  the  very  commence- 
ment cf  their  career.  Innumerable  companies 
are  formed  for  the  exploitation  of  some  par- 
ticular patent  article,  not  infrequently  imder 
the  supervision  of  the  patentee,  who  presently 
demonstrates  his  unfitness  for  practical  busi- 
ness management.  How  many  vicissitudes  do 
concerns  of  this  type  undergo,  due  to  changes  of 
management!    Every  capitalist  with  a  taste  for 


ill 


< 


II 


^1 


16        THE  DISTRIBUTION  OF  EXPENSE  BURDEN 

financing  inventions  can  call  to  mind  exam- 
ples of  this  class.  Every  one  can  remember 
with  what  hopes  and  fears  new  blood  has  been 
introduced,  and  with  what  anxiety  the  next 
half-yearly  or  yearly  balance  was  looked  for, 
to  lay  bare  the  result  of  the  change. 

It  is  not  yet  recognized  how  immensely  the 
task  of  a  competent  directorate,  to  say  nothing 
of  the  advantages  to  a  stranger  coming  fresh  to 
a  business  to  take  over  and  reorganize  its  work- 
mg,  would  be  faciUtated  by  the  adoption,  from 
the  very  first,  of  a  thoroughly  comprehensive 
method  of  recording  shop  work,  including  the 
connection  of  expenditure  of  all  classes  with  the 
items  of  output  on  which  they  are  incident. 
No  board  would  think  of  carrying  on  opera- 
tions without  a  set  of  conmaercial  books  ar- 
ranged by  an  accountant  in  whom  they  had 
confidence;  yet  the  equally  important  technical 
records  are  nearly  always  treated  in  an  amateur 
spu-it,  with  the  result  that  no  two  imdertakings 
collect  this  information  on  similar  Unes.    It  is 
commonly  left  to  the  taste  and  fancy  of  the 
manager  to  say  what  records,  if  any,  shall  be 
kept,  and  how  far  they  shall  represent  anything 
real  and  useful.    So  far  is  this  attitude  carried 
that  many  otherwise  experienced  business  men 
really  and  conscientiously  do  not  beUeve  that 
shop  accounts  are  of  any  use  at  all. 


GENERAL  CHARGES  AND  PIECE  COSTS 


17 


Yet  the  same  men  would  undoubtedly  give 
short  shrift  to  the  cashier  who  shirked  the  detail- 
ing of  his  petty-cash  account  on  the  groimd  that 
to  keep  track  of  small  detailed  expenses  was 
not  possible,  or  at  any  rate  not  worth  doing. 
Nevertheless,  the  possible  waste  represented  by 
an  undetailed  cash  accoimt  is  as  nothing  to  the 
possible  waste  represented  by  an  undetailed 
wages  roll.  And  still  more  important  is  it  to 
remember  that,  as  the  sum  of  cash  expended  is 
made  up  of  hundreds  of  small  items,  which  are 
and  should  be  analyzed  and  classified  so  as  to 
give  an  intelligible  idea  of  the  wisdom  of  the 
expenditure,  so  the  productive  activities  in 
the  shops  are  made  up  of  innumerable  small 
jobs,  which,  if  properly  marshalled,  wiU  tell 
precisely  the  same  tale  as  to  the  wisdom  of  the 
expenditure  on  them  as  the  money  payments 
in  the  cash  analysis. 

It  is  true  that  the  broad  results  of  a  half- 
year's  work  can  be  read  in  unmistakable  figures 
in  the  balance  sheet.  But  the  mischief  is  not 
only  done  by  that  time,  but  in  the  absence  of 
proper  shop  accounts,  it  cannot  be  ascertained 
where  is  the  element  at  fault.  To  introduce 
reform  one  must  first  know  where  reform  is 
necessary.  It  is  no  answer  to  this  to  say  that 
practical  experience  suppUes  the  deficiency.    A 


•w 


Ml 


18        THE  DISTRIBUTION  OF  EXPENSE  BURDEN 

man  with  a  file  and  a  true  plane  surface  can 
supply  a  duplicate  of  that  plane  surface  if  he 
has  sufficient  skill  and  works  long  enough,  but 
he  will  produce  the  same  result  more  quickly 
and  surely  if  he  has  a  machine  tool  of  the  high- 
est class  to  aid  him.  And  in  proportion  to  the 
accuracy  of  the  machine  tool  so  will  be  the  ease 
and  speed  of  the  perfonnance.  A  modem  sys-r 
tem  of  organization  is  a  high-class  machine  tool. 
It  can  be  done  without,  but  not  economically 
That  is  all  there  is  to  it.  The  wise  man  will 
make  his  own  choice.         ' 

Thus  far  the  argument  has  been  directed  to 
the  desirability  of  a  modem  method  of  shop 
accounting,  even  though  only  of  the  class  which 
merely  records,  and  does  not  work  up  the  results 
into  new  forms.  Attention  will  now  be  directed 
to  the  particular  subject  of  this  discussion — 
the  connection  of  work  with  the  expenditure 
properly  incident  upon  it.  It  will,  of  course,  be 
readily  imderstood  that  this  further  develop- 
ment implies  the  existence  of  a  highly  organized 
cost  system.  It  cannot  be  worked  at  all  in 
those  cases  where  wages  are  merely  analyzed 
each  week,  usually  by  a  more  or  less  forced 
agreement,  into  the  order  numbers  on  which 
they  have  professedly  been  expended.  Such  ai> 
rangement,  though  admirable  for  the  purposes 


GENERAL  CHARGES  AND  PIECE  COSTS 


19 


of  the  commercial  accountant,  is  useless  for  the 
technical  accountant.  And  while  the  results 
required  by  the  former  are  readily  furnished 
by  the  operations  of  the  latter,  the  converse 
of  the  proposition  is  a  clear  impossibility. 

The  clearest  demarcation  exists  between 
direct  (viz.,  allocable,)  and  indirect  wages — be- 
tween the  wages  of  fitters  and  planers,  and 
those  of  foremen,  timekeepers,  and  messengers. 
But  between  direct  and  indirect  expense,  the 
distinction  is  not  so  obvious.  Workmen's  time 
is  not  without  exception  and  at  all  times  being 
employed  on  orders  for  customers  or  stock. 
Whilst  it  is  evident  that  some  wages  never 
become  direct  expenditure  on  orders,  all  classes 
of  wages  are  liable  to  become  indirect  expendi- 
ture. The  same  thing  may  be  said  of  material. 
For  this  reason  the  unit  selected  from  which 
all  the  subsequent  erection  is  built  up,  is  neither 
the  wages  as  such  nor  the  material  as  such, 
but  the  job, 

A  definition  must  be  given  of  what  will 
throughout  these  chapters  be  meant  by  the 
term  "job."  In  this  respect  the  distinction 
drawn  by  Mr.  Slater  Lewis*  between  the  job 
and  the  works  order  is  adhered  to.  The  works 
order  may,  and  usually  does,  consist  of  a  con- 

'The  Commercial  Organisation  of  Factories." 


•  II' 


20 


THE  DISTMBDTION  OF  EXPENSE  BT7BDEN 


ii 


^\ 


Ml 


siderable  number  of  distinct  jobs.  Practically 
the  job  may  be  defined  as  the  amount  of  time 
spent  by  any  particular  workman  on  any  par- 
ticular piece  or  similar  set  of  pieces.  Thus, 
a  works  order  for  a  lathe  will  include  such  jobs 
as  planing  bed,  cutting  leading  screw,  milling 
slide  rest,  etc.  If  the  works  order  were  for 
six  lathes  of  similar  pattern,  the  jobs  would 
be  extended  similarly — as,  for  instance,  plan- 
ing six  beds,  cutting  six  leading  screws,  etc. 
In  the  case  of  work  done  otherwise  than  on 
customer's  stock  orders,  the  job  would  be  for 
items  such  as  new  screw  for  No.  45  lathe,  alter- 
ing position  of  band  saw  No.  67,  etc.  It  will 
be  evident  that  some  jobs  will  be  charged  with 
material  and  some  not.  Mere  process  work  is 
of  the  latter  class.  Generally  speaking,  while 
the  works  order  sets  in  motion  the  activities  of 
all  classes  of  labor,  the  job  is  individual  to  each 
man,  his  day's  work  being  made  up,  it  may  be 
of  one  job,  or  it  may  be  of  several  jobs. 

The  whole  output  of  a  shop,  for  any  given 
period,  consists  of  a  number  of  jobs,  and  of 
nothing  else.  When  we  know  all  there  is  to 
be  known  about  these  jobs,  we  can  form  a 
very  shrewd  idea  of  the  way  in  which  things 
are  going  in  that  shop. 

Now  the  elements  which  enter  into  the  cost 


a  ' 


II 


GENERAL  CHARGES  AND  PIECE  COSTS 


21 


of  a  job  are  many.  To  ascertain  merely  the 
actual  wages  and  material  spent  upon  it  is 
undoubtedly  something,  but  to  consider  these 
factors  alone  and  unqualified  as  a  basis  for  the 
comparison  of  the  relative  profitableness  of 
work  may  easily  lead  to  serious  misapprehen- 
sions. 

In  many  cases  the  desirability  of  introducing 
a  third  element  into  the  costs  becomes  at  an 
early  stage  obvious  to  the  practical  mind.  The 
difference  between  a  small  cheap  tool  and  some 
high-class  expensive  appliance  seems  to  demand 
recognition  in  the  costs  of  the  work  done  on 
either.  In  seeking  to  remedy  this,  an  attempt 
is  frequently  made  to  introduce  what  is  termed 
a  "machine  rate"  into  the  accounts — ^a  charge 
per  hour  for  each  tool  being  made  and  debited 
to  the  job,  in  addition  to  wages  and  materials. 
This  is  not  always  an  advance,  however.  While 
it  is  easy  to  see  that  a  charge  is  desirable,  it 
does  not  follow  that  the  fixing  of  such  charges 
is  either  simple  or  easy.  Usually  some  arbi- 
trary proportionate  rate  is  made,  supposed  to 
represent  the  interest  on  capital  sunk  in  the 
tool,  and  this  reduced  to  a  rate  per  hour  is 
charged  against  the  jobs  done  on  that  tool. 
The  first  objection  to  this  plan  is  that  tools  are 
not  in  constant  employment.    But  the  interest, 


I  ' 


iil 

I  n 


22        THE  DISTRIBUTION  OF  EXPENSE  BURDEN 

on  the  contrary,  does  not  cease  to  run  because 
the  machine  is  idle.  Hence  this  rough-and- 
ready  settlement  of  the  problem  is  deceptive 
and  may  even  lead  to  false  conclusions. 

This  illustration  has  been  introduced  here 
merely  to  show,  by  a  simple  and  familiar  case, 
the  general  tendency  of  all  attempts  to  deal 
with  shop  establishment  charges.  It  is  true 
that  by  means  of  the  machine  rate  no  more  is 
usually  attempted  than  to  burden  particular 
jobs  with  some  of  the  interest  on  the  machines 
concerned.  But  this,  although ,  as  we  have  said , 
ineffectual  even  for  the  special  purpose  intended, 
gives  a  very  definite  and  clear  idea  of  the  prin- 
ciple involved,  viz.,  the  spreading  of  shop  ex- 
penses over  jobs,  job  by  job,  upon  some  recog- 
nized basis  closely  connected  with  the  time 
occupied  and  the  way  of  doing  the  work. 

Even  on  this  rudimentary  plan,  it  is  easy  to 
see  that  the  prime  cost  and  the  shop  cost  have 
become  different  things.  If  two  jobs  take  three 
hours  each,  the  payment  for  labor  being  the 
same  in  each  case,  say  20  cents  per  hour,  we 
may  have  the  respective  costs  of  the  process 
$1.05  and  $1.95  respectively,  if  we  assume  ma- 
chine rates  of  15  cents  and  45  cents  in  each 
case. 


N 


GENERAL  CHARGES  AND  PIECE  COSTS 


23 


But  interest  is  by  no  means  the  only  item  of 
indirect  expense  worthy  of  being  identified  with 
jobs.  It  is,  in  fact,  one  of  the  smaller  of  many 
items.  Thus  it  is  that  prime  cost  is  in  extreme 
cases  not  even  the  larger  half  of  shop  cost,  and 
in  mass  production  may  even  cease  to  have  any 
tangible  value  whatever. 

Before  going  on  to  speak  of  shop  expenses  in 
detail  and  technically,  something  must  be  said 
of  their  relation  to  the  administrative  side  of  the 

business. 

Shop    estabUshment    charges    are,    without 
doubt,  in  many  cases  the  "lost  factor,"  absence 
of  which  makes  the  difference  between  success 
and  failure  in  a  commercial  sense.    There  is  a 
wide  difference  between   technical  excellence 
and  commercial  efficiency.    It  is  not  making  an\ 
article  that  is  the  object  to  be  attained,  but! 
making  it  at  a  price.    And  where  various  classes ' 
of  things  are  being  simultaneously  made,  some- 
thing more  accurate   than  practical   instinct 
is  desirable  as  a  guide  when  it  is  required  to 
decide  which  line  it  will  pay  to  exploit  commer- 
cially to  the  greatest  degree.    In  a  very  small 
undertaking  this  practical  instinct  may  be  suffi- 
cient, but  we  are  not  considering  the  case  of 
very  small  undertakings.  The  moment  the  work 


•     t 

t  \ 

] 

f    ' 

d  * 


24        THE  DISTRIBUTION  OF  EXPENSE  BURDEN 

gets  too  large  in  volume  for  all  its  minutest  de- 
tails to  be  carried  in  one  head,  the  necessity 
for  a  close  analysis  and  interiocking  of  expenses 
with  jobs  becomes  marked. 

Nor  must  it  be  supposed  that  the  "depart- 
mentalization" of  imdertakings  is  more  than  one 
step,  though  certainly  a  very  necessary  step,  in 
the  solution  of  this  problem.  To  separate  the 
expenses  incurred  in  or  in  connection  with 
the  work  or  organization  of  each  shop  does 
not  usually  help  us  to  any  knowledge  of  the 
interior  economy  of  that  shop,  if  more  than 
one  class  of  articles  are  passing  through  it. 
In  the  rare  case  that  a  department  contains 
machines  of  one  size  and  pattern,  performing 
exactly  the  same  operations  on  a  single  variety 
of  work,  it  is  true  that  very  little  would  remain 
to  be  done,  but  this  condition  of  affairs  rarely 
obtains.  Generally  speaking,  it  remains  true 
that  departmentalization  is  quite  a  separate 
transaction  from  the  interlocking  of  charges 
with  costs. 

An  important  fimction  discharged  by  shop 
cost  as  distinguished  from  prime  cost  is  the 
information  afforded  to  the  draughtsman  when 
considering  the  question  of  design.  The  de- 
signer has  to  arrange  to  give  full  play  to  the 
actual  conditions  of  the  shop  much  as  an  archi- 


GENERAL  CHARGES  AND   PIECE  COSTS 


25 


tect  has  to  consider  the  circumstances  of  the 
site,  by  which  he  is  often  fettered. 

It  is  not  a  question  of  producmg  a  purely 
theoretical  plan  free  from  all  limitations  of 
practice  that  he  has  to  study,  but  how  to 
arrange  to  make  a  given  article  with  a  given 
set  of  plans,  and  a  given  organization,  so  that 
the  capabiUties  of  these  fixed  elements  are  uti- 
lized to  the  utmost. 

It  will  be  evident  that  the  best  chance  of 
domg  this  exists  where  the  actual  shop  condi- 
tions are  fully  known,  and  mter-related  with 
the  work  abeady  done.    Great  discrimination 
is  of  course  necessary  in  considering  these  fac- 
tors, but  it  is  the  natural  course  of  things  that 
as  the  industry  increases  in  complexity,  the 
intelligence  required  to  conduct  it  successfully 
requires  more  and  more  careful  training  and 
selection.    This  is  a  tendency  against  which  it 
is  useless  to  protest. 

A  not  unimportant  matter  on  which  the  shop- 
charges  question  has  a  very  definite  bearing 
is  that  of  valuation  for  stock  taking.  When  it 
is  considered  that  the  truth  of  a  balance  sheet 
must  obtain  all  its  vitality  from  the  valuation 
of  finished  work  and  of  work  in  progress  through 
the  shops,  the  immense  importance  of  a  correct 
basis  for  such  valuation  will  appear.     Unfor- 


A   ''vr. 


:1 


m 


26 


THE  DI8TBIBUTI0N  OF  EXPENSE  BURDEN 


m 


tunately,  there  appears  to  be  no  sort  of  uni- 
fonnity  of  practice  with  regard  to  this  matter. 
In  some  cases  prime  cost  is  taken  as  the  basis 
of  reckoning;  in  other  cases  arbitrary  percent- 
ages are  added,  and  even  in  these  latter  there 
is  a  divergence  of  practice.  Sometimes  they 
are  added  to  time  only,  sometimes  to  prime 
cost,  but  in  no  case,  within  my  knowledge,* 
is  any  attempt  made  to  discriminate  between 
various  classes  of  manufactures.  Now,  a  mo- 
ment's consideration  will  suflBce  to  show  that 
any  system  of  general  percentage  must  be  most 
unfair.  So  must  the  method  of  basing  valu- 
ation on  simple  prime  cost.  The  reason  is 
obvious.  All  valuation  is  an  attempt  to  repre- 
sent certain  facts.  The  facts  are  undubitably 
these:  the  charges  incident  on  a  variety  of 
articles  as  truly  represent  part  of  the  cost  of 
such  articles  as  the  actual  direct  wages  paid  on 
them.  And  these  charges  are  rarely,  it  would 
be  safe  to  say  never,  identical  in  theh*  incidence 
on  different  classes  of  articles  nor  are  they 
constant  from  period  to  period.  Therefore  an 
attempt  to  represent  their  value  either  by  ignor- 
ing this  factor  of  production  or  by  applying  an 
arbitrary  increment  or  percentage  eqiially  on 

*  Exception  must  be  made,  of  course,  in  the  case  of  work« 
organized  on  the  writer's  system. 


GENERAL  CHARGES  AND  PIECE  COSTS 


27 


all,  will  produce  not  any  approach  to  facts,  but 
merely  a  fancy  figure,  which  will  be  not  even 
constant  in  its  error.  It  is,  in  fact,  a  guess, 
and  not  the  less  so  because  based  on  figures. 
Arrangements  of  this  kind  probably  originated 
the  unkind  saying  that  figures  will  prove  any- 
thing, "except  facts." 

The  cost  of  production,  as  dealt  with  in  this 
discussion,  will  be  considered  uniformly  as 
divided  into  three  great  divisions.  First,  the 
bare  cost  of  wages  and  materials,  which  will 
be  called  Prime  or  No.  1  cost.  Secondly,  the 
prime  cost  plus  the  expense  of  production  in- 
curred in  passing  through  the  shops;  this  I 
shall  refer  to  as  Works  or  No.  2  cost.  Thirdly, 
the  works  cost  plus  the  expenses  of  the  commer- 
cial management  and  selling  organization,  which 
is  termed  Inclusive  or  No.  3  cost.  This  classi- 
fication will  be  remembered  better  by  examina- 
tion of  the  diagram  (Figure  1)  which  represents 
the  total  sale  price  of  an  article  dissected  into 
its  constituent  factors. 

In  this  diagram  it  will  be  seen  that  the  cost  of 
materials  and  of  wages,  taken  together,  make  up 
Prime  or  No.  1  cost.  Material,  wages,  and  shop 
establishment  charges  make  up  No.  2  or  Works 
cost.  And  material,  wages,  shop  charges,  and 
general  establishment  charges  make  up  Inclu- 


I 


i 


11 


28        THE  DISTRIBUTION  OP  EXPENSE  BURDEN 

sive  or  No.  3  cost.    This  last,  subtracted  from 
the  sale  price,  gives  the  profit  on  that  order. 

The  organization  of  no  works  can  be  con- 
sidered complete  mitil  it  is  able  not  merely  to 
connect  its  costs  o/  all  classes  with  its  jobs,  but 
also  to  check  its  financial  position  by  aggregat- 
ing its  profits  on  sales  item  by  item.    Ctf  course 


-Selling  Price.  (400- 


r 


■  Inelu8iv«  or  No.3  Coat,  |350- 


-Works  or  No^  Cost,  (250 ' 


Prime  or  No.1  Coat.  $150 


llateria 
$50 


Waffea 
1100 


Shop  Charge 
HOO 


General 

Eitablishment 

Charge 

1100 


Profit 
150 


FIG.  I.      ANALYSIS  OF  THE  SALE  PRICE  OF  A  MANUFACTUBSD 

ARTICLE 

the  latter  process  is  merely  a  corollary  or  deduc- 
tion from  the  cost  factor.  Having  ascertained 
the  latter  in  the  form  shown  by  the  diagram, 
the  net  profit  on  any  sale  becomes  a  trifling 
matter  of  arithmetic. 

Some  attention  should  be  given  to  a  clear 
understanding  at  this  stage  of  the  very  definite 
line  drawn  between  works  cost  and  inclusive 


GENERAL  CHARGES  AND  PIECE  COSTS 


29 


cost.  Works  cost,  as  its  name  implies,  repre- 
sents the  expenditure  of  all  sorts  upon  the  work, 
up  to  its  delivery  into  warehottse.  It  is  the  cost 
of  production,  and  of  nothing  but  production. 
Inclusive  cost  is  works  cost  plus  what  the  com- 
mercial arm  has  spent  on  it  to  effect  a  sale. 
The  distinction  will  become  clearer  if  we  sup- 
pose the  case  of  a  business  having  its  works 
in  the  country,  and  its  conamercial  office  in  the 
metropolis.  The  expenses  of  the  former  would 
fall  into  works  cost,  and  the  expenditure  of  the 
latter  would  be  classed  as  general  establish- 
ment charges.  It  is,  of  course,  understood  that 
all  the  correspondence,  packing,  etc.,  was  per- 
formed by  the  metropolitan  office,  and  that  the 
works  has  nothing  to  do  but  to  manufacture. 
There  are,  of  course,  certain  expenses  which 
may  be  doubtful  and  their  inclusion  in  one 
division  or  another  is  subject  to  the  actual  cir- 
cumstances. Of  this  kind  are  draughtsmen. 
In  some  cases,  the  cost  of  drawings  is  certainly 
a  works  expenditure  and  chargeable  to  the  job. 
The  same  applies  to  patterns.  But,  generally 
speaking,  the  basis  of  division  is  this:  if  a  draw- 
ing or  pattern  is  chargeable  against  a  given 
order,  it  should  be  treated  as  part  of  prime  cost, 
but  in  all  other  cases  as  a  general  establishment 
charge — never  in  any  case  as  a  shop  establish- 
ment charge. 


fi 


r  I 


30         THE  DISTRIBUTION  OF  EXPENSE  BURDEN 

The  necessity  for  and  the  justice  of  this 
distinction  between  shop  charges  and  general 
charges  (works  cost  and  inclusive  cost)  hardly 
needs  insistence.  It  has  been  ably  and  exhaus- 
tively argued  in  the  work  of  Mr.  Slater  Lewis, 
already  referred  to,  but  the  argument  may  be 
briefly  recapitulated  here. 

Nothing  is  naturally  more  distinct  than  thev 
operations  of  making  and  seUing.  They  require 
different  instincts  and  widely  separate  talents. 
An  imdertaking  may  be  most  efficiently  organ- 
ized and  managed  on  one  of  these  sides,  and  yet 
be  imsuccessful,  because  what  is  gained  in  one] 
set  of  efforts^is  lost  in  another.  What  is  more 
useful,  therefore,  than  to  make  this  natural 
division  of  work  to  be  reflected  by  a  similar 
division  in  the  system  of  accounting?  It  is  the 
easiest  and  simplest  of  all  the  modifications 
with  which  we  shall  meet,  because  it  is  the 
most  obvious  and  fimdamental. 

In  the  chapters  which  follow,  works  cost  will 
occupy  nearly  the  whole  of  the  field.  This  is 
because  as  yet  general  establishment  charges 
are  not  capable  of  any  great  amount  of  detailed 
analysis.  But  by  keeping  them  separate  and 
distinct,  and  thus  excluding  them  from  affecting 
the  operations  of  the  works,  we  are  enabled  to 
follow  the  latter  in  very  great  detail,  and  to  feel 
sure  of  our  result. 


DISTRIBUTING  EXPENSE  TO 
INDIVIDUAL  JOBS. 


Chapter  II. 

DISTRIBUTING  EXPENSE  TO  INDIVIDUAL 

JOBS. 

A  SSUMPTION  is  made  in  what  follows  that 
-^^  a  system  of  taking  out  prime  costs  is 
ah-eady  in  use,  which  summarizes  the  expendi- 
ture in  each  department  into:  (1),  wages  and' 
materials  expended  on  stock  or  customers'^ 
orders;  and  (2),  other  expenditure,  such  as 
repairs,  supervision,  and  similar  indirect  items 
of  expense. 

Having  obtained  the  total  of  indirect  expen- 
diture for  any  shop,  there  are  several  recognized 
ways  of  establishing  a  ratio  or  proportion  be- 
tween the  value  of  work  done  in  a  given  period, 
such  as  a  month,  and  this  indirect  expense. 
This  ratio  may  be  established  as  a  percentage 
on  wages,  or  expenses  may  be  divided  over  the 
number  of  hours  worked,  or  they  may  be  dis- 
tributed in  some  approach  to  a  differential 
method  of  treatment  by  means  of  machine 
rates  varying  in  value.  Each  of  these  methods 
must  be  considered  in  detail. 


p 


II 


T 


34        THE  DISTRIBUTION  OF  EXPENSE  BURDEN 

The  Percentage-on-Wages  Method. 

Where  any  attempt  is  made  to  distribute 
shop  charges  over  work  at  aU,  this  method  is 
the  one  most  usually  employed,  at  any  rate  in 
Great  Britain.  The  probable  reason  of  this  is 
that,  though  capable  of  considerable  refine- 
ments, it  is  as  usually  employed  a  ''handy," 
or  in  other  words  a  rough-and-ready,  method. 
In  order  to  distribute  shop  charges  on  this 
plan,  all  that  is  necessary  is  to  obtain  first, 
the  total  of  charges;  the  second,  total  of  wages 
on  actual  orders  during,  say,  a  month  in  each 
case,  and — ^find  the  percentage  of  one  to  the 
other.  Thus,  if  in  a  given  month  we  have 
spent: 


Items. 
Direct  Expenditure  on 
Orders. 

Shop  Establishment  Charges : 

Repairs  and  Maintenance . . 

Spoiled  Work 

Supervision 

General  Laboring 

Share  of  Storekeeping,  Time-  \ 

keeping,  Etc j 

Proportion  of  Rents,  Rates' 

Power,    Light    Heat,  Etc. 

for  this  Department 


Total  of  Shop  Charges 29 


Wages.  Material.  Total. 


100 


15 
2 
5 
7 


56 


4 
1 


156 

10 
3 
$ 
7 

8 
17 

89 


Total  Wages  and  Material  in 
Shop 


} 


129 


61 


)* 

!•*, 


DISTRIBUTING  ^EXPEKSB  TO  INDIVIDUAL  JOBS   ^S 

We  find  that  as  against  $100  direct  wages  on 
order,  we  have  an  indirect  expenditure  of  $59, 
or,  in  other  terms,   our  shop  establishment 
charges  are  59  per  cent  of  direct  wages  in  that 
shop  for  the  period  in  question.    This  is,  of 
course,  very  simple.   It  is  also  as  usually  worked 
very  inexact.    It  is  true  that  as  regards  the  out- 
put  of  the  shop  as  a  whole  a  fair  idea  is  obtained 
of  the  general  cost  of  the  work— that  is,  of  its 
works  (or  No.  2)  cost.    And  in  the  case  of 
a  shop  with  machines  aU  of  a  size  and  kind, 
performing  practicaUy  identical  operations  by 
means  of  a  fairly  average  wages  rate,  it  is  not 
alarmmgly  incorrect. 

^  If,  however,  we  apply  this  method  to  a  shop 
m  which  large  and  smaU  machines,  highly  paid 
and  cheap  labor,  heavy  castings  and  small 
parts,  are  aU  in  operation  together,  then  the 
result,  unless  measures  are  taken  to  supplement 
it,  is  no  longer  trustworthy. 

The  reason  why,  under  these  conditions,  it  is 
no  longer  to  be  regarded  as  a  scientific  method 
IS  not  far  to  seek.  The  case  of  the  difference 
in  the  value  of  work  done  on  different  machines 
as  regards  one  item  alone,  viz.,  the  interest 
factor,  has  ah-eady  been  aUuded  to.  But  this 
IS  not  the  only  point  of  differentiation.  The 
space  occupied  by  machines  varies,  the  power 


f 


1 


36        THE  DISTRIBUTION  OF  EXPENSE  BURDEN 

taken  by  them  varies.  And  in  the  case  of  men 
at  high  and  low  rates  of  wages,  the  cheap  man 
takes  up  as  much  room  as  the  expensive  man, 
and  probably  takes  much  more  supervision; 
large  parts,  again,  use  powerful  cranes  and 
occupy  the  time  of  laborers  in  their  progress 
about  the  shops,  to  say  nothing  of  the  room 
required  for  their  evolutions. 

Now  on  the  simple  percentage  plan,  it  is  not 
only  that  these  factors  of  difference  are  ignored, 
but  the  basis  actually  used  for  the  distribution 
of  charges,  viz.,  the  cost  of  the  job  as  meas- 
ured in  dollars  or  shillings,  though  apparently 
a  "natural"  one,  is  really  quite  arbitrary  and 
without  any  real  relation  to  the  actual  problem. 

That  this  is  so  will  be  allowed  when  it  is 
considered  that  the  effect  in  the  costs  of  lowering 
the  wages  rate  of  a  man,  is  also  to  reduce  the 
amount  of  establishment  charges  which  gets 
allocated  to  the  job  by  the  system  of  percent- 
ages. If  this  represented  anything  like  the 
facts  it  would  not  be  so  bad;  but  unfortunately, 
the  highest  probability  exists  that  by  substitut- 
ing a  poorly  paid  man  for  a  good  man  on  any 
particular  job,  the  true  proportion  of  charges 
would  be  actually  increased.  He  would  take 
longer,  for  one  thing,  yet  as  his  longer  time 
occupied  is  counterbalanced  by  a  smaller  total 


DISTRIBUTING  EXPENSE  TO  INDIVIDUAL  JOBS    37 

of  wages,  the  percentage  would  not  be  increased. 
Again,  he  would  probably  absorb  more  of  the 
foremen's  attention,  but  this  would  not  show 
in  the  accounts.  In  short,  the  result  of  the 
change  would  really  be  to  increase  the  cost  of 
the  works—the  works  cost— but  the  apparent 
effect  would  be  to  reduce  it,  because  the  prime 
cost  might  be  reduced,  and  the  burden  of  the 
charges  which  were  before  allocated  to  that 
job  would  fall  on  other  jobs  with  which  it  has 
nothing  to  do. 

In  certam  kmds  of  business  it  is  possible  to 
apply  a  compensating  arrangement.  Where  the 
class  of  work  is  fairly  steady,  and  the  bulk  of 
the  work  done  in  any  one  shop  is  on  different 
parts  of  the  same  kind  of  machine,  certain 
carefully  considered  but  still  to  a  large  extent 
arbitrary  variations  of  the  incidence  may  be 
arranged.  The  work  may  be  divided,  for  exam- 
ple, into  three  or  more  classes  Skccordmg  to  size 
of  castings,  such  as  heavy,  medium,  and  light, 
the  percentages  bemg  so  adjusted  that  the  heavy 
class  takes  x  per  cent  more  than  the  medium 
class,  and  the  medium  class  y  per  cent  more 
than  the  light  class.  By  this  means  the  whole 
of  the  shop  charges  will  be  distributed  as  before 
over  the  wages  expended  on  orders,  but  not 
uniformly.    The  heavier  work  gets  burdened 


f 


\t 


38        THE  DISTRIBUTION  OP  EXPENSE  BURDEN 

more  heavily  than  the  light  work,  and  therefore 
absorbs  more,  while  the  light  work  absorbs 
less  than  it  would  have  done  without  this  com- 
pensation. 

The  method  requires,  however,  very  elabor- 
ate and  careful  arrangements  for  determining: 
(1),  the  basis  on  which  to  divide  the  ratio  of 
percentages;  and  (2),  an  equally  close  consider- 
ation of  every  article  manufactured  to  decide 
in  which  class  it  should  be  included.  Where 
this  is  done  the  method  gives  satisfaction;  but 
it  should  not  be  forgotten  that  anything  like 
hasty  or  careless  dealing  with  the  varying  fac- 
tors vitiates  the  value  of  the  whole  method. 
But  with  proper  precautions  it  is  a  very  con- 
venient and  elastic  system,  if  confined  to  shops 
which  fulfil  the  conditions  above  stated. 

The  Hourly-Bukden  Plan. 

The  broad  principle  of  this  method,  in  all  its 
varieties,  is  based  on  the  consideration  that  the 
shop  as  a  whole  may  be  considered  as  a  factor  of 
production,  and  can  be  charged  for  at  an  hourly 
rate  against  the  work  done  on  orders.  The 
standing  charges,  the  cost  of  maintenance,  and 
the  shop  organization,  are  summarized  as  for 
the  percentage  plan,  but  the  resulting  figure  is 
dealt  with  quite  differently.    Instead  of  spread- 


J 


Wages.    Material.        Total. 
29  5  59 


DISTRIBUTING  EXPENSE  TO  INDIVIDUAL  JOBS   39 

ing  the  shop  charges  over  the  cost  of  individual 
jobs,  as  measured  by  the  direct  wages  spent, 
these  charges  are  spread  over  them  according 
to  the  number  of  hours  during  which  work  has 
been  done  on  them. 

Item. 
Total  of  Shop  Charges 

(as  before.) 

Total  Hours  Worked  on  Orders  During  Month— 3,000  Hours, 

— -  «  $0.0197  per  Hour  Worked. 
oUUU 

Thus,  if  we  have  $59  as  before,  representmg 
the  whole  of  the  shop  charges  for  one  month, 
we  require  to  ascertain  the  time  actually  worked 
reproductively,  that  is  on  orders,  and  reduce 
this  total  of  $59  to  a  rate  per  hour  on  such  re- 
productive time.  There  are  variations  of  this 
naethod,  but  the  principle  is  the  same  in  all, 
viz.,  making  an  hourly  charge  for  the  shop 
organization  and  expenses. 

A  httle  consideration  will  show  that  this 
method  may  produce  quite  a  different  works 
(or  No.  2)  cost  from  the  same  set  of  figures 
arranged  on  the  percentage  plan.  It  is  claimed 
by  the  advocates  of  the  hourly-burden  method 
that  it  is  far  superior  in  that  a  nearer  approach 
to  the  real  conditions  of  work,  i.e.,  to  facts,  is 
realized  by  making  the  hour  rather  than  the 
dollar   or  shilling   the   basis   of   distribution. 


|i 


40        THE  DISTRIBUTION  OP  EXPENSE  BURDEN 


I 


li 


« 


!r 


/ 


Some  of  the  obvious  faults  of  the  percentage 
system  are  undoubtedly  removed  by  it.  The 
elimination  of  wages  as  the  basis  of  distribution 
certainly  removes  the  great  reproach  of  the 
former  system,  viz.,  that  it  makes  the  works 
cost  on  any  particular  job  slavishly  follow  the 
prime-cost  figures,  and  therefore  tends  to  make 
cheap  labor  bungling  over  a  job  for  an  unneces- 
sarily long  time  appear  profitable.  It  brings 
into  full  prominence  the  essential  fact  that  to 
have  work  hanging  about  is  a  costly  proceed- 
ing, however  low-priced  the  actual  labor  may 
be.  Perhaps  this  is  the  most  important  fea- 
ture of  the  method — it  contributes  to  a  clearer 
view,  to  more  exact  picturing,  of  the  immense 
importance  of  the  time  factor  in  production. 

But  when  we  consider  the  system  as  fulfilling 
the  r61e  of  a  scientific  method  of  apportioning 
estabUshment  charges,  it  is  easily  seen  to  fall 
short  of  perfection  in  a  serious  sense.  Just 
as  the  percentage  method  stakes  all  upon  the 
single  factor  of  wages,  so  the  hourly-burden 
plan  stakes  everything  upon  the  single  factor  of 
time.  The  mere  statement  of  this  peculiarity 
is  sufficient  to  show  that  we  have  here  a  method 
which  sacrifices  a  great  deal  for  the  sake  of 
simplicity.  To  take  one  item  alone,  no  dis- 
crimination between  large  and  costly  and  small 


DISTRIBUTING  EXPENSE  TO  INDIVIDUAL  JOBS    41 

and  cheap  machines  is  brought  into  play.    Sim- 
plicity is  a  good  thing,  but  as  an  end  in  itself  is 
worth  nothing.     What  is  required  is  an  exact 
method  of  apportioning  estabUshment  charges, 
a  method  which  will  allow  us  to  obtain  figures 
which  are  closely  approximate  to  facts,  because 
they  follow  the  actual  and  known  conditions 
obtaining  in  the  shops,  as  far  as  we  know  how 
to  make  them.    If  any  method  fails  to  do  this, 
when  it  can  be  done  in  greater  degree  by  an- 
other method,  its  simplicity  is  nothing  in  its 
favor.    At  the  same  time,  it  may  be  allowed 
that  for  particular  conditions  the  hourly-bur- 
den  plan    will   give   satisfactory   results.     In 
shops,  for  example,  where  there  is  uniformity  in 
the  class  of  machines  employed  and  in  the  kinds 
of  work  passing  through,   the  simple  hourly 
burden  gives  substantial  accuracy.    These,  it  / 
will  be  observed,  are  also  the  conditions  under  ( 
which  the  percentage  plan  has  been  stated  to 
be  apphcable.    The  reason  of  this  is  not  the 
similarity  of  the  two  methods,  but  because  in 
such  cases,  the  conditions  are  at  a  maximum  of 
simplicity.    In  other  words,  where  we  have  a 
simple  set  of  facts  to  represent,  their  representa- 
tion is  an  equally  simple  matter. 

We  have  here  an  unportant  key  to  the  dis- 
cussion of  the  suitability  of  any  system.  Ahnost 


42        THE  DISTRIBUTION  OP  EXPENSE  BURDEN 


I 


any  method  will  represent  simple  conditions. 
But  will  any  given  method  break  down  when 
the  conditions  become  complex?  This  is  the 
touchstone.  As  work  ia  not  arranged  to  suit 
methods  of  record,  but  mce-versa,  it  is  evident 
that  we  must  seek  a  method  capable  of  record- 
ing with  approximate  accuracy  imder  the  most 
complex  and  difficult  conditions.  We  may  then 
feel  quite  secure  that  it  will  also  record  simple 
conditions  in  a  simple  manner.  It  is  putting  the 
cart  before  the  horse  to  consider  the  simple 
matters  first. 


The  Machine-Rate  Method. 

This  is  perhaps  the  oldest  and  most  wide- 
spread of  all.  It  is  not  a  modem  method.  By 
this  is  meant  that  it  belongs  to  a  former  period, 
in  which  the  close  accuracy,  the  monthly  bal- 
ances, and  other  refinements  of  accounting  had 
not  been  heard  of,  and  that  therefore  it  cannot 
be  considered  as  among  the  scientific  systems 
of  distributing  shop  establishment  charges.  In 
fact,  it  does  not  usually  pretend  to  deal  with 
shop  charges,  in  the  general  sense,  at  all.  The 
usual  function  of  the  machine  rate  is  to  burden 
the  work  with  a  charge  proportionate  to  the 
interest  on  and  the  wear  and  tear  of  the  machine. 
As  usually  arranged  it  is  an  hourly  charge, 


DISTRIBUTING  EXPENSE  TO  INDIVmUAL  JOBS    43 

based  on  the  probable  life  of  the  machine  under 
full  work.    In  this  sense  it  is  intelligible.    But 
cases  do  exist  in  which  it  has  been  attempted  to 
make  it  represent  more  than  this,  by  increasing 
the  amount  arbitrarily,  so  as  reaUy  to  charge 
part  of  the  shop  expenses  through  it  as  weU. 
This  is  exceedingly  bad  practice.     Why  it  is 
bad  will  be  seen  presently.    The  machine  rate 
may  be  looked  upon  as  belonging  to  the  Silurian 
epoch  of  shop  accounting.    It  is  theachthyo- 
saurus  of  expense  systems.    It  attempts  to  do 
m  a  heavy,  blundering'  way  what  is  hardly 
worth  doing  at  all.    Considered  in  its  legiti- 
mate aspect— as  a  means  of  distributing  the 
burden  of  interest  and  depreciation  on  any 
machine  over  the  work  done  on  that  machine— 
^it  does  this  successfuUy  under  one  set  of  con- 
ditions only,  viz.,  if  such  machine  is  never  for  a 
moment  idle.    This  being  its  condition  of  maxi- 
mum perfection,  it  foUows  that  the  greater  the 
proportion  of  idle  hours,  the  less  accurate  will 
be  the  results  obtained  from  the  method.    A 
httle  consideration  wiU  lead  to  the  conclusion 
that,  m  a  slack  time,  the  work  done  in  the 
shops  will  be  receiving  just  the  same  burden  as 
m  a  busy  time,  with  every  machine  running  fuU. 
The  balance  of  expenditure  not  aUocated  to  jobs 
IS  just  lost  sight  of. 


!J.-JJ 


a 


kaaaaitflB 


^ 


:^ 


44        THE  DISTRIBUTION  OF  EXPENSE  BURDEN 

This  is  a  serious  enough  matter  if  we  consider 
the  machine  rate  as  a  charge  for  interest  and 
depreciation  only.  But  if  we  look  on  it,  as  is 
sometimes  done,  as  a  medium  for  distributing 
some  (unknown)  fraction  of  the  shop  charges, 
the  absurdity  of  the  method  will  be  obvious. 
It  will  not  compare  for  this  purpose  with  either 
the  percentage  plan  or  the  hourly-burden  plan. 
Yet  with  all  its  impossibiUty  as  a  modem 
system,  the  machine  rate  has  certain  practical 
advantages,  shared  by  no  other  method.  It 
does  take  into  account  just  what  is  missed  by  the 
former  systems,  viz,,  the  variation  in  the  cost 
of  work  done  on  different  typea  of  machines. 
This  feature,  which  practical  instinct  easily 
recognizes,  has  secured  its  siurival.  Though 
it  cannot  be  considered  as  a  good  method,  it 
has  had  its  value  as  a  compromise  between 
bare  prime  cost  and  a  regular  apportionment 
of  charges.  It  tells  something  definite — some- 
thing which  is  valuable,  but  which  is  neither  as 
definite  nor  as  valuable  as  it  might  be. 

The  fact  that  it  estabhshes  a  permanent  rela- 
tion between  the  work  and  the  machine  is  a 
valuable  feature.  By  a  permanent  relation  is 
meant  a  relation  which  does  not  change  or 
fluctuate  with  conditions  of  work  in  the  shop. 
The  charge  for  the  machine  being  always  x, 


DISTRIBUTING  EXPENSE  TO  INDIVIDUAL  JOBS    45 

whether  the  shop  is  slack  or  busy,  brings  a  very 
steady  factor  into  account,  which  is  available 
as  a  datum  of  comparison  between  work  done  at 
different  periods  as  no  other  factor  is  available. 
The  prime  cost,  for  instance,  is  no  absolute  guide 
for  comparison  of  efficiencies,  since  rates  of 
wages  vary  not  always  in  direct  proportion  to 
personal  output.    The  shop  charges  on   the 
two  former  systems  also  fluctuate  violently, 
but  the  machine-rate  value  remams  constant! 
This  is  because  it  is  a  pure  function  of  tune.    It 
is  true  that  for  all  practical  purposes  the  time 
itself  is  the  very  factor  which  it  is  desirable  to 
know.    And  remembering  this,  it  is  not  diffi- 
cult to  see  that  we  can  obtain  this  information 
without  necessarily  being  bound  to  a  non-fluc- 
tuating charge.  ^ 

General  R6sum6  of  the  Foregoing  Methods. 

There  have  now  been  passed  in  review  the 
three  fundamental  methods  of  allocating  shop 
charges  over  work  so  as  to  produce  works  (or 
No.  2)  cost.  Of  these  only  the  first  and  second 
give  a  real  No.  2  cost  in  the  sense  that  all  the 
charges  for  a  given  period  are  spread  over  pro- 
ductive work. 

It  will  have  been  seen  that  there  are  two  di&- 
tinct  ways  only  of  doing  this.    The  charges 


,1 


It 


46        THE  DISTKIBUnON  OP  EXPENSE  BURDEN 

must  be  distributed  either  on  "wages  value" 
as  a  basis,  or  on  "time  occupied*'  as  a  basis. 
For  ordinary  manufacturing  operations  there 
is  no  other  alternative.  In  certain  special  in- 
dustries a  distribution  on  imits  of  weight  or 
measure  might  be  necessary,  but  we  need  not 
pause  to  consider  these.  Generally  speaking, 
we  have  to  choose  between  wages  value  or 
time  as  a  unit  on  which  to  distribute.  , 

The  weak  point  of  the  percentage  and  the 
hourly-burden  system  is  that  it  is  an  averaged 
result  at  which  we  ultimately  arrive,  and  which 
we  try  to  regard  as  the  true  works  or  No.  2 
cost.    Now,  it  is  just  as  wrong  to  average  such 
charges  as  it  would  be  to  throw  all  wages  paid 
into  one  sum,  and  average  this  over  the  number 
of  hours  worked,  taking  the  result  as  a  true 
wages  cost.    In  the  case  of  wages  this  is  seen 
to  be  an  absurdity,  and  no  question  of  simplic- 
ity or  convenience  would  be  allowed  to  stand  in 
the  way  of  collecting  the  actual  wage  cost  of 
each  job  in  an  engineering  works.    An  average- 
wages  charge  is  easily  seen  to  be  misleading  and 
dangerous. 

V^Yet  in  certain  cases  where  only  one  class  and 
size  of  article  is  turned  out  in  one  shop,  this 
averaged-wages  cost,  although  several  variations 
of  rates  may  be  included  in  the  total  sum  before 


DISTRIBUTING  EXPENSE  TO  INDIVmUAL  JOBS    47 

averaging,  is  not  only  useful  but  is  actually 
used.    It  works  successfully  in  such  cases  be- 
cause of  the  extreme  sunpUcity  of  the  condi- 
tions.   Only  one  set  of  factors  being  concerned 
VIZ.,  a  smgle  process  and  a  single  variety  and 
size  of  article,  the  average  charge  for  wages 
sops  up  mequaUties  of  rates,  which  inequalities 
are  not  due  to  exigencies  of  manufacture  but  to 
exigencies  of  employment.    Here  we  have  an 
exceUent  example  of  a  method  of  accounting, 
correct  within  narrowlimits,  but  obviously  break- 
ing down  the  moment  those  limits  are  exceeded. 
The  impropriety  of  applying  such  a  system 
of  averagmg  wages  to  a  shop  in  which  several 
processes,  different  grades  of  workers,  and  sepa- 
rate sizes  and  classes  of  articles  are  concerned 
needs  no  argument.    It  can  be  realized  at  a 
glance.    But  this  case  of  wages  is  exactly  on 
all  fom^  with  the  case  of  shop  establishment 
charges.    Under  very  simple  and  uniform  con- 
ditions   a  method   of  distributing  estabHsh- 
ment  charges  which  averages  such  charges  per 
doUar  of  wages  or  per  hour  of  time  is  correct, 
but  m  proportion  as  we  depart  from  these  sim- 
pie  conditions  we  also  depart  from  accuracy. 

This  is  not  a  mere  theoretical  and  pedantic 
distmc  ion.  These  shop  charges  frequently 
amount  to  100  per  cent,  125  per  cent,  and  even 


«. 


48 


THE  DISTRIBUTION  OF  EXPENSE  BURDEN 


IC 


{: 
i 


L 


■■I 


much  more  of  the  du'ect  wages.  It  is  therefore 
often  actually  more  important  that  they  should 
be  correct  than  that  the  actual  wages  cost 
should  be  correct.  If  we  have  to  put  a  dime 
and  also  a  quarter  in  a  certain  collecting  bag, 
it  is  certainly  more  important  that  the  quarter 
should  not  go  astray  than  that  the  dime  should 
be  looked  after. 

It  is  true  that  by  no  possible  method  can  we 
avoid  averaging  shop  charges  to  a  certain  ex- 
tent. But  we  can  reduce  this  extent  to  a  mini- 
mum, thereby  attaining  a  high  average  of  accu- 
racy. In  the  end  we  have,  of  course,  to  choose 
between  one  or  other  of  the  alternatives  already 
mentioned,  viz.,  wages  or  hours,  for  the  distribu- 
tion. Yet  by  avoiding  the  attempt  to  force 
simplicity  of  results  into  the  representations  of 
conditions  which  are  by  no  means  simple,  and 
by  letting  our  method  follow  the  natural  lines 
of  the  actual  complexity,  we  can  arrive  at 
results  which  are  no  longer  averaged  to  any- 
thing like  the  same  extent,  but  are  on  the  con- 
trary highly  differentiated. 

The  Elements  of  an  Ideal  System. 

A  little  preliminary  consideration  may  be 
given  to  the  features  which  might  be  looked  for 
in  an  ideally  perfect  method  of  interconnecting 


S  1 


DISTRIBUTINa  EXPENSE  TO  INDIVIDUAL  JOBS    49 

establishment  charges  and  work.    Having  en- 
tirely cleared  one's  mind  of  any  traditions  of 
what  IS  usual  or  conventional  under  the  averag- 
ing regime,  it  becomes  visible  that  several  of 
the  Items  of  shop  charge  are  naturaUy  con- 
nected with  the  use  and  employment  of  property 
or  plant,  and  are  in  the  nature  of  a  rent  paid  for 
these.    In  this  categoiy  are:— Rent,  taxes,  and 
msurance  on  buildings,  interest,  depreciation 
on  machines,  on  cranes,  shafts,  motors,  etc. 
Otheritems  are  connected  with  other  factors 
of  production.    Power,  with  the  use  of  same  by 
machmes;  cost  of  lighting  or  heating,  with  axea. 
of  floor  space  usuaUy  lighted  or  heated-in 
short,  not  to  go  into  detail  at  this  stage,  it  is 
readily  seen  that  a  large  number  of  shop  charges 
are  by  no  means  general  in  their  real  nature  but 
can  be  narrowed  down  to  definite  points  of 
mcidence. 

In  an  ideal  system,  it  would  therefore  be 
expected  that  this  narrowing  down  should  be 
earned  aa  far  as  it  was  practically  profitable  to 
do  so,  and  that  only  such  expenses  aa  were 
whoUy  general  and  could  not  by  any  reasonable 
analysis  be  connected  with  definite  points  of 
incidence,  should  be  treated  as  general  shop 
charges,  and  therefore  left  to  be  averaged  on 
the  former  basis.    This  looks  complex.    And 


1. 


50 


THE  DISTRIBUTION  OP  EXPENSE  BURDEN 


*1 


i 


m 


51 


undoubtedly  under  the  most  favorable  circum- 
stances the  preparations  are  complex;  but,  as 
will  be  seen,  a  working  method  (which  after 
all  is  the  only  thmg  in  which  simphcity  is 
important,  or  at  any  rate  essential)  can  be  de- 
vised which  is  not  more  troublesome  than  other 
methods  of  distributing  shop  charges.  Before 
gomg  on  in  the  ensuing  chapters  to  explain  the 
prehminary  steps  and  the  methods  of  working, 
an  idea  will  be  given  of  the  new  point  of  view  on 
which  the  method  advocated  is  based. 

We  have  seen  that  it  is  a  very  sunple  matter 
to  represent  the  conditions  of  a  shop  in  which 
the  work  is  uniform  and  all  the  conditions  con- 
stant.    All  the  charge  factors,  whatever  their 
real  point  of  incidence,  press  equally  on  all  por- 
tions of  the  work  in  such  a  shop,  and  there 
is  therefore  no  differentiation  possible  between 
different  portions  of  the  work.    In  a  mixed 
shop,  on  the  contrary,  these  factors  do  not 
press  equally— power,  floor  space  occupied,  with 
its  burden  of  rent,  interest,  insurance,  lighting, 
etc.,  interest  on  capital  outlay  for  machines — 
all  vary  as  between  jobs.    There  is  no  justifica- 
tion for  treating  such  charges  as  an  average  if  it 
can  possibly  be  avoided.    Hence  it  is  evident 
that  in  the  distribution  of  such  charges  the  shop 
can  no  longer  be  considered  as  a  unit,  but  some- 


DISTRIBUTING  EXPENSE  TO  INDIVIDUAL  JOBS    51 

thing  smaUer  must  be  taken.  Of  course,  to 
subdivide  the  shop  into  smaller  areas  would  be 
no  solution  of  this  problem.  The  mixture  of  the 
factors  of  incidence  would  be  as  great  in  half 
a  shop  as  in  a  whole  shop.  A  new  point  of 
view  is  necessary. 

It  becomes  desirable  to  look  at  what  the 
expression  ''shop"  reaUy  signifies.    If  we  regard 
the  shop  as  an  organic  whole,  (which  it  no  doubt 
is,  or  should  be),  we  get  no  new  light.    We  may 
perceive  clearly  enough  the  cross-fire  of  factors 
of  incidence  bearing  unequally  in  different  parts 
of  It,  but  are  no  nearer  their  disentanglement. 
But   if  we  regard  the  shop  as  a  collection 
of  small  "production  centres,"  each  differing 
from   the  other,   with   certain   common   con- 
necting  bonds  which  are  alone  the  average  or 
general  factors  of  incidence,  then  the  problem 
suddenly  becomes  clear.    If,  instead  of  tum- 
mg  our  energies  to  cover  up  the  natural  differ- 
ences between  these  ''production  centres"  and 
make  an  average  of  them,  we  devote  our  atten- 
tion to  giving  the  fullest  play  to  this  difference, 
we  may  claim  to  have  subdivided  the  shop  in  a 
new  sense,  and  to  a  new  end. 

A  production  centre  is,  of  course,  either  a 
machine  or  a  bench  at  which  a  hand  craftsman 
works.    Each  of  these  is  in  the  position  of  a  ht- 


I 


I 


1  ■• 

, 

1 

! 

c, 


52         THE  DISTRIBUTION  OF  EXPENSE  BUBDSN 

tie  shop  carrying  on  one  little  special  industry, 
paying  rent  for  the  floor  space  occupied,  inter- 
est for  the  capital  involved,  depreciation  for  the 
wear  and  tear,  and  so  on,  quite  independently 
of  what  may  be  paid  by  other  production  centres 
in  the  same  shop.  Then,  in  addition  to  this, 
there  will  be  a  separate  debit  representing  those 
items  of  incidence  which  can  only  be  treated 
as  an  average  all-round  charge.  The  cost  of 
each  production  centre  is,  of  course,  laden  onto 
the  work  by  a  rate  per  hour.  Here  we  seem 
to  have  come  back  to  a  machine-rate  method, 
subject  to  all  the  defects  of  that  method,  par- 
ticularly as  regard  the  idle  hours.  If  the  new 
process  ended  here  it  would  be  of  little  use,  but 
it  does  not  end  here. 

It  will  be  seen,  when  this  portion  of  the  sub- 
ject is  reached,  that  whilst  the  rate  for  the  pro- 
duction centre  is  kept  constant,  the  waste  of 
resources  due  to  idle  production  centres  is  not 
lost  sight  of,  but  finds  its  due  place  in  the  works 
cost  simply  enough,  and  in  such  a  way  that  it 
has  a  special  significance  of  its  own. 

One  prominent  advantage  of  the  plan  of  re- 
ducing each  shop  to  its  constituent  production 
centres  as  a  basis  for  distributing  estabUshment 
charges  should  be  noticed.  The  most  heteroge- 
neous processes  may  be  carried  on  side  by  side. 


DISTRIBUTINQ  EXPENSE  TO  INDIVIDUAL  JOBS     53 

Having  narrowed  down  the  greater  portion  of 
the  shop  charges  to  their  fundamental  points  of 
incidence,  we  need  no  longer  be  afraid  of  any 
conditions,  however  complex.  Unhke  the  aver- 
aging methods,  almost  any  actual  workmg  con- 
ditions can  be  faithfully  represented  on  this 
system.  This  is  because  each  production  cen- 
tre is  virtually  independent  of  any  other,  and 
therefore  complexity  is  indifferent  to  it. 

It  will  be  seen,  for  instance,  that  it  is  applic- 
able to  heavy  engineering  work,  to  mass  pro- 
duction, and  even  to  that  most  complex  class 
of  work,  in  which  ahnost-automatic  machine 
work  side  by  side  with  ordinary  machine  tools. 


I 


L'* 


''if     ' 


THE  SCIENTIFIC  MACHINE   RATE 

AND  THE 
SUPPLEMENTARY  RATE. 


Chapter  III. 


1 


(I 


I 


^ 


r 


THE  SCIENTIFIC  MACHINE  RATE  AND  THE 
SUPPLEMENTARY  RATE. 

TN  the  preceding  chapter,  an  outline  of  a  new 
•■•     basis  of  determining  the  incidence  of  shop 
establishment  charges  was  given.    Before  pass- 
ing to  consideration  of  the  preliminary  measm-es 
necessary  to  its  introduction,  the  effect  and 
results  of  the  method  will  be  detailed.    The 
apparent  similarity  of  the  system  to  the  old 
device  of  the  machine  rate  has  been  alluded  to; 
the  points  of  difference  will  now  be  brought  into 
prominence.    It  will  be  remembered  that  the 
principle  on  which  the  proposed  method  was 
stated  to  be  based,  was  that  of  dividing  each 
shop  up  into  its  constituent  ''production  cen- 
tres" and  giving  full  play  to  the  natural  differ- 
ences between  these  as  far  as  practicable,  instead 
(as  on  the  averaging  plan)  of  throwing  them  into 
one  conamon  receptacle  or  lump  sum  of  shop 
charges.    It  was  also  pointed  out  that  this 
of  itself  would  be  subject  to  all  the  defects  of 
the  old  machine-rate  method,  inasmuch  as  the 

67 


58        THE  DISTRIBUTION  OP  EXPENSE  BURDEN 

problem  of  idle  hours  is  still  unsolved.  There 
is  also  the  problem  of  those  actually  general 
charges,  which  cannot  by  any  reasonable  allo- 
cation be  connected  with  particular  production 
centres. 

Leaving  these  latter  out  of  account  for  the 
moment,  it  will  be  seen  that,  admitting  all 
machines  or  production  centres  to  be  running 
full  time,  it  would  be  possible  so  to  adjust  the 
rents  or  machme  rates  payable  for  the  use  of 
these  centres  during  one  hour,  that  at  the  end 
of  any  period,  say  a  month,  the  whole  of  the 
shop  charges  would  find  themselves  attached 
to  particular  jobs,  according  to  the  time  taken 
by  each  job. 

TOTAL  OF  SHOP  CHARGES  FOR  1  MONTH  «  $200. 


Working 
Machine.      Hours  per 
Month. 
A  200 

B  200 

C  200 

D  200 


Rate  per 
Hour  on 
New  Plan. 
40  Cents 
30  Cents 
20  Cents 
10  Cents 


Monthly 
Earnings  on 
New  Plan. 
180.00 
60.00 
40.00 
20.00 


rv  r\  L  ,'^T.  lui^^nts  20.00 

$^  ^"^         ^  ^^  ^°^  machines,  800.    Hourly 
burden  =-gQQ  =  25  cents. 

ctZ'i^imoO^''*^'*  ^^  bourly-burden  plan,  800  hrs.  @  25 

In  the  above  schedule,  there  has  been  given 
the  case  of  a  certain  shop,  m  which  the  monthly 


MACHINE  RATES  AND  SUPPLEMENTARY  RATE    59 

total  of  shop  charges  was  $200.  The  tune  made 
by  the  constituent  production  centres,  viz.,  ma- 
chines A,  B,  C,  and  D,  was  200  hours  each,  or 
800  in  all.  Now  on  the  hourly-burden  plan 
this  would  give  an  average  hourly  rate  of  25 
cents  for  all  jobs,  on  whichever  machines  they 
happened  to  have  been  done. 

But  it  is  assumed  that  the  application  of  the 
new  method  and  thereby  the  separation  instead 
of  lumping  together  of  the  incidence  of  charges 
has  resulted  in  the  rates  of  machine  A  being 
fixed  at  40  cents,  of  B  at  30  cents,  of  C  at  20 
cents,  and  of  D  at  10  cents.  Again  assuming 
the  full  number  of  hours  to  be  worked,  it  is 
easy  to  see  that  we  get  considerable  differences 
in  the  resulting  incidence  of  shop  charges  on  the 
two  plans.  The  charge,  for  instance,  on  a  job 
which  occupied  5  hours  of  machine  D  and  1 
hour  of  machine  A  would  be: 

On  hourly-burden  plan— 6  hours  at  25  cents 
=  $1.50. 

On  new  plan— 5  hours  on  D  at  10  cents  =  50 
cents;  1  hour  on  A  at  40  cents  =  40  cents:  total, 
50  +  40  =  90  cents. 

We  may  now  consider  what  would  be  the 
incidence  under  the  percentage-of-wages  method 
of  distribution.  Let  it  be  assumed  that  the 
wages  of  operators  on  A  and  B  machines  are 


I 


f 


00        THE  DISTRIBUTION  OP  EXPENSE  BURDEN 

20  cents  per  hour,  and  of  operators  on  C  and  D 
machines  15  cents  per  hour.  Reckoning,  as 
before,  200  hours  per  month,  for  each  machine, 
we  find: — 

Total  wages  for  one  month,  |140;  and  as 
shop  charges  are  $200  this  gives  an  average  of 
142  per  cent  on  wages-value  for  all  work  done, 
by  whichever  operator  or  whichever  machine 
concerned.  Hence  we  get  the  charges  incident 
on  the  job  we  have  been  considering. — 

6  hours  of  operator  on  D  at  15  cents  -  76 
cents,  on  which  charges  at  142.9  per  cent  = 
J1.07. 

1  hour  of  operator  on  A  at  20  »  20  cents,  on 
which  charges  at  142.9  per  cent  =  28  cents. 

Total  charges  for  job  $1.07  +  $0.28  =  $1.35. 

We  have  now  worked  out  this  job  on  three 
methods,  and  find  different  results  in  each  case, 
viz: — 

On  hoiu-ly-burden  plan $1 .  50 

On  new  plan 0.90 

On  percentage  method 1 .35 

Which  of  these  is  most  correct? 

The  nearness  of  results  obtained  by  the 
hourly-burden  and  the  percentage  plan  makes 
these  two  methods  apparently  support  each 
other.    But  this  in  reahty  is  due  to  the  fact  that 


liACHINS  RATES  AND  SUPPLEMENTARY  RATE    61 

we  have  assumed  a  very  shght  difference  (only 
5  cents)  between  the  highest  and  lowest  wages 
rate.    This  contributes  to  make  the  real  basis 
of  distribution  as  nearly  uniform  in  this  case 
as  the  hourly  burden.    By  this  is  meant  that 
the  value  of  an  hour  having  been  made  nearly 
uniform,  it  is  much  the  same  in  effect  whether 
we  distribute  on  hours  or  value  of  hours.    It 
will  be  recognized  that  in  proportion  as  wages 
rates  differ  so  will  the  discrepancy  between 
the  distribution  on  the  hour  and  on  the  hour- 
value  increase.    Between  these  two  methods 
there  is  already  a  difference  of  15  cents,  which, 
as  just  shown,  might  easily  have  been  much 
greater  if  the  difference  in  the  assumed  wages 
rates  had  been  made  larger.    To  begin  with 
then,  let  us  ask  which  of  these  two  may  be  con- 
sidered the  more  accurate.    The  discrepancy 
being  clearly  due  to  the  introduction  of  the 
wages  factor  as  a  measure  of  incidence,  we  need 
only  inquire  whether  this  lowering  of  the  charge 
under  the  percentage  system  is  a  nearer  ap- 
proach to  truth  than  the  other. 

If  we  assume  that  the  $200  of  shop  charge 
is  whoUy  made  up  of  standing  expenses,  rent, 
interest,  depreciation,  and  such-like,  we  must 
decide  in  favor  of  the  nearer  correctness  of  the 
hourly-burden  plan  in  principle.    It  at  least  is 


I 


II 


lit 


^        THE  DISTRIBUTION  OF  EXPENSE  BURDEN 

based  on  an  invariable  basis,  which,  though  not 
representing  the  real  state  of  affairs,  is  constant 
in  its  error.  But  we  can  easily  see  that  the 
other  result  has  more  of  the  element  of  chance 
in  it.  It  will  vary  according  to  just  what 
man  has  happened  to  be  on  the  particular  job. 
And  if  the  worker  did  not  receive  any  wages  at 
all,  the  charges  would  be  reduced  to  nil. 

This  objection  still  holds,  though  in  the  par- 
ticular job  cited  the  percentage  plan  has  given 
us  a  figure  nearer  to  that  provided  by  the  new 
plan  than  the  hourly-burden  figure,  which  we 
have  notwithstanding  argued  to  be  the  more 
correct  in  principle.  This  paradox  is  explained 
by  the  consideration  that  had  by  any  chance 
the  wages  not  been  scaled  proportionately  to  the 
machine  rates,  the  discrepancy  would  be  far 
greater  between  the  new  and  the  percentage, 
than  between  the  new  and  the  hourly  plan. 
In  the  case  of  a  low-waged  operator  working  a 
highly  rated  machine,  and  vice  versa,  the  dis- 
crepancies would  plainly  pass  from  positive 
to  negative  on  the  percentage  plan,  whilst  on 
the  other  two  plans  they  would  not  vary. 
The  fault  of  the  percentage  plan  is,  then,  that 
it  fluctuates  according  to  a  factor  which  cannot 
be  considered  as  really  representing  a  true  and 
\^  corresponding   variation   in   the   incidence   of 


MACHINE  RATES  AND  SUPPLEMENTARY  RATE    63 

shop  charges.  The  fault  of  the  hourly-burden 
plan  is  that  it  does  not  vary  at  all.  As  between 
these  two  evils,  our  preference  must  be  for  that 
one  which  produces  the  most  constant  error. 

It  has  been  assumed  in  the  above  argument 
that  the  new  plan  does  produce  a  result  not 
merely  relatively  more  correct  than  either  of 
the  two  others,  but  that  it  gives  a  normal  re- 
sult closely  connected  with  actual  conditions  of 
work.  Remembering  that  we  are  still  discuss- 
ing the  case  of  a  shop  in  which  all  machines  are 
making  full  tune,  it  is  difficult  to  see  how  we 
are  to  avoid  coming  to  this  conclusion.  It  is 
evident  that  the  standing  charges,  at  any  rate, 
comprising  such  items  as  interest  and  deprecia- 
tion on  particular  machines,  the  proportion  of 
rent,  taxes,  insurance,  heating,  etc.  (which  may 
be  considered  as  reduced  to  a  certain  uniform 
charge  for  each  square  yard  of  floor  space,  and 
thus  debited  according  to  the  working  space 
occupied  by  any  machine)  and  all  charges 
aUied  to  these,  can  be  as  properly  assigned  to 
particular  production  centres  as  in  the  case  of 
rents  in  large  buildings  which  are  let  out  in 
subdivided  areas  to  tenants. 

No  sophistry  is  needed  to  assume  that  these 
charges  are  in  the  nature  of  such  rents,  for  it 
might  easily  happen  that  in  a  certain  building 


y/ 


:^i\ 


I  1 


64 


THE  DISTRIBUTION  OF   EXPENSE  BURDEN 


a  number  of  separate  little  shops  were  estab- 
lished, each  containing  one  machine,  all  making 
some  particular  part  or  working  on  some  partic- 
ular operation  of  the  same  class  of  goods,  but 
each  shop  occupied,  not  by  a  wage  earner,  but 
by  an  independent  mechanic,  who  rented  his 
space,  power,  and  machinery,  and  sold  the 
finished  product  to  the  lessor.  Now,  in  such 
case,  what  would  be  the  shop  charges  of  these 
mechanics?  Clearly  they  would  comprise  as 
their  chief  if  not  their  only  item  just  the  rent 
paid.  And  this  rent  would  be  made  up  of :  (1) 
interest;  (2),  depreciation;  (3)  insurance;  (4) 
profit  on  the  capital  involved  in  the  building, 
machine,  and  power-transmitting  and  generat- 
ing plant.  There  would  also  most  probably  be 
a  separate  charge  for  power  according  to  the 
quantity  consumed. 

Exclude  the  item  of  profit,  which  is  not  in- 
cluded in  the  case  of  a  shop  charge,  and  we  find 
that  we  have  approached  most  closely  to  the 
new  plan  of  reducing  any  shop  into  its  con- 
stituent production  centres.  No  one  would 
pretend  that  there  was  any  insuperable  difficulty 
involved  in  fixing  a  just  rent  for  little  shops  let 
out  on  this  plan.  Nor  can  there  be  any  more 
diflficulty  in  fixing  the  proper  charges  for  each 
production  centre  in  a  large  shop.    The  little 


MACHINE   RATES  AND  SUPPLEMENTARY  RATE     65 

shops  are,  in  fact,  a  large  shop  when  we  take 
away  the  partitions  which  divide  them.  The' 
presence  of  these  partitions  certainly  seems  to 
make  the  problem  more  definite  and  concrete, 
but  this  is  a  mere  illusion.  There  is  a  new  pomt 
of  view  involved,  which,  once  grasped,  enables 
us  to  see  separately  things  which  otherwise  have 
a  look  of  conglomeration. 

This  illustration  of  the  Httle  independent 
shops  is  also  useful  in  helping  to  discuss  the 
question  of  idle  hours.    In  each  of  these  little 
shops,  whether  idle  or  busy,  the  rent  is  gomg 
on  all  the  time.    Only  the  charge  for  power 
might  conceivably  be  stopped  whilst  the  shop 
was  shut.    Now  if  the  mechanic  in  one  of  these 
shops  is  only  working  half  his  time,  it  is  pretty 
clear  that  he  must  double  his  rate  of  distribution 
on  such  work  as  he  does,  if  he  is  to  distribute  his 
month's  rent  over  his  month's  work.    But, 
instead  of  doubling  his  rate,  he  might  continue 
to  charge  at  the  normal  rate,  and  then  at  the 
month  end  find  how  much  he  was  yet  in  arrear, 
and  distribute  this  undistributed  amount  only 
as  a  supplementary  rate.     In  this  way  he  would 
benefit  in  two  ways.    First,  his  normal  rate 
being  constant,  he  can  compare  costs  of  jobs 
worked  on  at  different  periods;  and  secondly, 
the  amount  of  the  supplementary  rate,   (its 


II 


■I;*- 


i 


06        THE  DISTRIBUTION  OF  EXPENSE  BURDEN 


.1 

n 


ratio  to  the  normal  rate,)  will  serve  as  a  very 
accurate  barometer  of  the  conditions  under 
which  he  has  been  working  at  any  period.  If 
the  normal  rate  has  been  so  fixed,  for  instance, 
that  when  fully  employed  the  supplementary 
rate  was  nil  per  cent  of  the  normal,  then  if  he 
observes  it  steadily  rising  5  per  cent,  10  per 
cent,  15  per  cent,  etc.,  he  may  be  fairly  sure 
that  things  are  not  going  well  with  him.  Of 
course,  in  the  case  of  a  little  shop  this  would  be 
perfectly  clear  to  him  without  the  aid  of  the 
rates  to  tell  him  so;  but  if  we,  now,  throw  down 
all  the  partitions  and  make  the  hundred  sepa- 
rate Uttle  shops  into  one  large  general  shop,  this 
information  may  be  very  important  indeed  to 
those  in  authority. 

The  meaning  of  the  term  supplementary  rate 
will  now  be  understood.  It  is  this  which  is 
the  invaluable  complement  to  the  machine  rate 
and  which  makes  the  great  distinction  between 
f  the  new  method  and  the  old  machine-rate 
/  method.  The  supplementary  rate  is  the  undis- 
I  tributed  balance  of  shop  charges  due  to  idleness 
\of  productive  centres, 

^  ^  In  the  illustration  just  given  of  the  little 
shops,  it  will  be  seen  that  the  imdistributed 
balance  due  to  slackness  of  one  machine  is 
thrown  onto  whatever  work  is  done  at  all  on 


MACHINE  RATES  AND  SUPPLEBfENTART  RATE  67 

that  machine  at  some  time  or  other.  This  is, 
of  course,  necessary  in  the  case  of  independent 
httle  shops;  but  when  the  partitions  are  down, 
and  we  consider  the  case  of  a  bona  fide  large 
shop  with  a  number  of  production  centres,  this 
is  no  longer  always  possible,  or  even  desirable 
from  some  points  of  view. 

The  idleness  of  a  machine  may  or  may  not  be 
considered  as  the  fault  of  that  machine.  If,  for 
instance,  a  machine  was  found  to  be  idle  nine- 
teen-twentieths  of  its  time,  this  might  be  due  to 
one  of  two  causes.  Either  the  process  was  rare 
but  essential,  or  the  machine  itself  was  largely 
superfluous.  In  the  first  case  it  would  be  emi- 
nently fair  that  the  charge  should  be  made 
very  high  when  it  was  put  in  use,  since  the 
shop  charges  due  to  its  presence  and  up-keep 
are  indubitably  incurred  for  the  sake  of  this 
occasional  use.  In  the  second  case  it  might 
be  rather  a  matter  of  accommodation  that  the 
machine  was  retained  at  all,  in  which  case  the 
shop  as  a  whole  should  bear  the  burden,  and 
not  the  unlucky  piece  of  work  that  should 
happen  to  be  put  on  such  machine  at  any  time. 

Here  we  have  one  of  those  matters  of  principle 
which  are  incapable  of  a  general  solution.  The 
procedure  proper  would  vary  according  to  actual 
circumstances.    Nevertheless,  the  general  prac- 


I* ' 

Lf  .1 


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t  f 


'ii : 


68        THE  DISTRIBUTION  OF  BXPKNSS  BURDEN 

tice  will  probably  be  that  idle  machines  shall 
get  rid  of  the  burden  undistributed  during  their 
idle  periods,  not  by  charging  it  especially  in 
their  working  periods,  but  by  transferring  it 
to  the  general  shop-charges  account. 

If  we  adopt  this  view  of  the  usual  destination 
of  idle  hour's  burden,  then  we  introduce  at 
once  a  striking  difference  between  the  case  of 
the  little  independent  shops  and  the  same  ma- 
chines considered  as  production  centres  of  one 
large  shop.  In  the  former,  idle  time  accumu- 
lates against  its  own  machine;  in  the  latter, 
all  imdistributed  charges  fall,  not  into  the  ^up>- 
plementary  rate  of  particular  machines,  but 
into  a  general  supplementary  rate  for  the  whole 
shop.  It  is  also  into  this  supplementary  rate 
that  the  really  general  expenses  of  the  shop  fall. 

The  full  outline  of  the  new  plan  may  now  be 
seen.  First,  we  consider  each  machine  as  an  in- 
dependent production  centre,  allocating  to  such 
centres  all  the  expenses  and  charges  which  can, 
on  reasonable  analysis,  be  considered  charge- 
able as  a  composite  rent  dji\  machine  rate  for 
all  the  factors  of  production  therein  concerned. 
Second,  we  charge  to  a  monthly  shop-charges 
account  all  charges  whatever  incurred  by  that 
shop,  including  all  the  items  specifically  repre- 
sented in  fractional  detail  by  the  machine  rates, 


MACHINE  RATES  AND  SUPPLEMENTAKT  RATE    t)9 

and  also  including,  of  course,  such  general 
Items  as  cannot  be  represented  in  the  machine 
rates,  of  which  the  most  obvious  item  is  the 
supervision  of  a  head,  or  foreman. 

Then,  as  each  machine  is  occupied  on  jobs 
the  latter  are  debited  with  so  much  per  hour  as 
machine  rate,  and  at  the  end  of  the  month  the 
total  amount  so  earned  by  the  machines,  is 
deducted  from  the  total  shop  expenses,  leaving  a 
balance  which  is  distributed  over  the  same  job 
a«  a  supplementary  rate.  The  ratio  of  the  sup- 
plementary rate  to  the  amount  distributed  by 
the  machine  rates  forms  a  varying  barometer, 
whose  fluctuation  is  an  index  to  the  current 
efl[iciency  of  the  sho^^^  , 

It  wiU,  of  course,  be  obvious,  from  what  has 
already  been  said,  that  when  the  machines  are 
ftU  running  full  time  the  supplementary  rate 
wiU  consist  of  the  general  charges  alone,  such 
as  the  foreman's  wages,  which  have  not  any 
individual  connection  with  particular  machines. 
This  will  be  the  condition  of  maximum  effi- 
ciency in  the  shop.    In  proportion  as  aU  ma- 
chmes  are  not  kept  fuU  of  work  aU  the  time, 
this  ratio  of  the  supplementary  rate  to  the 
amount  distributed  by  the  machine  rates  will 
begin  to  rise.    The  same  effect  will  occur  if  any 
general  kind  of  expenditure  is  increased. 


I 


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70        THE  DISTMBUnON  OF  EXPENSE  BURDEN 

While  we  have  now  seen  the  principle  of  the 
supplementary  rate  in  detail,  there  yet  remains 
the  question  on  what  basis  the  additional  dis- 
tribution shall  take  place.  It  may,  for  instance, 
be  made  into  an  ordinary  hourly  burden,  or, 
which  is  simpler,  may  be  reduced  to  a  percent- 
age of  increase  on  the  amount  already  distrib- 
uted by  the  machine  rate.  In  the  case  of  the 
shop  whose  charges  amount  to  $200,  cited  above, 
we  may  suppose: — 

Machine  A  worked  120  hours  @  40  cents  = 
$48.00  for  month. 

Machine  B  worked  134  hours  @  30  cents  = 
$40.20  for  month. 

Machine  C  worked  169  hours  @  20  cents  = 
$33.80  for  month. 

Machine  D  worked  200  hours  @  10  cents  = 
$20.00  for  month. 

Total  623  hours.    Total  burden  distributed, 

$142. 

Now  deducting  the  total  burden  distributed 
through  these  machine  rates,  viz.,  $142,  from 
the  full  month's  total  of  shop  charges,  viz., 
$200,  this  leaves  $58  as  a  residual  or  undis- 
tributed amount.  This  forms  the  amount  to  be 
made  the  subject  of  the  supplementary  rate, 
but  this  itself  may  take  two  forms.    It  may  be 


MACHINE  RATES  AND  8UPPLEMENTART  RATE  71 

treated  as  an  hourly  burden,  thus: — $58  spread 
over  623  hours  worked  =  9J  cents  per  hour, 
which  amount  would  have  to  be  added  to  the 
amount  already  allocated  by  means  of  the 
machine  rate;  or,  it  might  be  that  the  residual 
amoimt  is  reduced  to  a  percentage  of  the  amount 
already  distributed,  thus: — total  burden  dis- 
tributed by  machine  rates,  $142,  residual| 
amount,  $58;  supplementary  rate  =  per  cent 
of  increase  on  machine-rate  amount,  =  40.9 
per  cent.  On  this  latter  plan  the  calculation 
of  the  correct  incidence  of  shop  charges  is 
reduced  to  a  very  simple  matter.  First  we  get 
a  certain  amount  charged  against  the  job  by  the 
medium  of  the  machine  rate.  This  represents 
strictly  the  normal  charge  for  that  machine 
when  under  full  work.  Then  at  the  month 
end  we  find  the  actual  ratio  of  undistributed 
to  distributed  charges,  and  increase  the  debit 
against  individual  jobs  accordingly.    Thus: — 

5  hours  of  machine  B  at  30  cents  =  $1 .  50 
Supplementary  rate  at  40.9  per 
cent =  $0.61 


Total  charges 


=     2.11 


This  represents:  (1),  a  proportion  of  the  really 
general  charges  of  the  shop;  and  (2),  an  averaged 


72        THE  DISTRIBUTION  OP  EXPENSE  BURDEN 

distribution  of  the  idle  hours  of  any  or  all  the 
machines  in  the  shop. 

As  by  the  new  machine-rate  plan  we  have 
only  subtracted  from  the  total  charges  just  those 
charges  which  can  be  connected  with  different 
production  centres,  it  follows  that,  as  regards 
the  remainder,  we  are  again  face-to-face  with 
the  problem  of  finding  a  suitable  basis  on  which 
to  make  the  distribution  of  incidence. 

The  discussion  of  which  is  the  better  and 
more  just  way  of  distributing  this  residual 
amount,  or  supplementary  rate,  is  worthy  of 
some  attention.  Theoretically,  as  regards  the 
idle  hours,  we  are  averaging  these  over  the  work 
actually  done,  and  this  on  the  basis  of  their 
being  considered  as  the  fault  of  the  shop  as  a 
whole,  and  not  of  any  particular  machine;  but 
this  may  be  as  well  attained  by  distributing  the 
supplementary  amount  directly  as  an  hourly 
burden,  or  a  pro  rata  increase  of  amounts  already 
charged  through  the  machine  rates. 

The  general,  or,  as  we  might  more  conveni- 
ently term  them,  the  floating  shop  charges, 
plus  the  unallocated  charges  due  to  idle  ma- 
chines, are  obviously  not  connected  in  any  defi- 
nite way  with  the  work.  They  must  be  aver- 
aged on  one  basis  or  another,  and  the  basis 
should  be  as  constant — that  is,  subject  to  aa 


MACHINE  RATES  AND  SUPPLEMENTARY  RATE  73 

few  variations— as  possible.  This  definition  is 
better  fulfilled  by  the  hour  than  the  hour-value. 
It  is  to  be  preferred,  therefore,  that  the  supple- 
mentary rate  should  be  an  hourly-burden  rate. 
This,  though  not  quite  as  simple  in  routine 
as  the  percentage  form  of  supplementary  rate 
just  described,  is  the  more  accurate,  because 
the  incidence  of  the  imallocated  charges  can- 
not be  considered  as  varying  within  the  value 
of  different  machines,  but  rather  as  pressing 
equally  on  all  work  done  in  the  shop  hour  by 
hour,  irrespective  of  whatever  machine  it  may 
be  done  on.  Nevertheless,  the  percentage  sup- 
plementary rate  is  not  without  its  arguments, 
since  it  means  virtually  a  pro  rata  increase  of 
machine  rates  in  slack  times,  and  this  is  very 
much  like  what  might  be  conceived  to  happen 
in  the  case  of  the  separate  little  shops  which 
have  been  used  all  an  illustration,  supposing 
that  from  one  cause  or  another  it  became  neces- 
sary for  the  landlord  or  owner  to  get  the  same 
return  out  of  a  smaller  number  of  little  shops. 
He  would  raise  the  rents.  But  this  is  exactly 
equivalent  to  a  distribution  of  the  supplemen- 
tary rate  as  a  percentage  on  the  amount  already 
distributed  by  machine  rates. 

This  is  m  any  case  quite  a  different  matter 
from  a  percentage  distribution  of  shop  charges 


■>l 


.  .5 


w 


I 


74 


THE  DISTRIBUTION  OF  EXPENSE  BURDEN 


on  wages,  and  is  not  vitiated  by  the  arguments 
already  directed  against  that  method.  At 
this  stage  the  matter  may  be  left  an  open  one, 
with  preference  in  favor  of  the  hourly-burden 
method  of  distributing  the  supplementary  rate. 

A  summary  of  the  complete  scheme  of  ma- 
chine rates  and  supplementary  rates  is  now 
possible. 

The  principle  followed  is  to  connect  expendi- 
ture with  production  centres,  (which  for  the 
most  part  mean  machines,)  wherever  this  is 
possible  and  as  far  as  it  is  possible.  These 
charges  are  debited  to  jobs  by  machine  rents 
or  rates  so  carefully  arranged  as  to  include  all 
of  them.  All  these  items  of  expenditure,  and 
others  which  we  term  floating  or  general  items 
(which  do  not  enter  into  the  composition  of  the 
machine  rates  at  all)  are  collected  into  a  monthly 
shop-charges  account.  This  account  is  relieved 
by  the  total  of  charges  which  have  been  debited 
to  jobs  during  the  month,  by  means  of  machine 
rates,  leaving  in  the  accoimt  a  residual  sum, 
which  has  yet  to  be  got  rid  of  and  allocated 
to  jobs.  The  supplementary  rate  affects  this, 
either  by  reducing  the  residual  amount  to  an 
hourly  burden,  distributed  over  the  jobs  in  the 
usual  way,  or,  more  simply  but  somewhat  less 
accurately,  by  finding  the  proportion  or  ratio 


'i 


MACmNE  RATES  AND  SUPPLEMENTARY  RATE     75 

of  the  residual  sum  to  the  amount  already  dis- 
tributed by  machine  rates,  and  then  increasing 
the  amounts  already  allocated  to  each  job  by 
so  much  per  cent. 

It  will  be  obvious  that  by  this  means  all  the 
charges  will  be  distributed,  leaving  nothing  in 
the  charges  account,  and  that  if  all  the  machines 
have  made  full  time  in  the  month,  the  supple- 
mentary rate  will  only  represent  the  floating 
shop  charges.  In  proportion  as  machines  are 
idle  the  supplementary  rate  will  rise,  because 
only  working  hours  are  credited  to  the  shop 
account  as  per  the  total  of  the  machine  rates 
found  at  the  end  of  the  month. 

Thus  we  secure  that  each  job  gets  its  own 
expenses  only  attached  to  it,  plus  an  average  of 
floating  charge  and  of  what  surplus  may  be  due 
to  slack  times  or  inefficiency  in  the  shop. 


i 


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V 


'Hit 


CLASSIFICATION  AND  DISSECTION 
OF  SHOP  CHARGES. 


Chapter  IV. 

CLASSIFICATION  AND  DISSECTION  OF 
SHOP  CHARGES. 

TN  the  preceding  chapters  the  practical  effects 
"■•  of  the  new  method  have  been  developed, 
special  stress  being  laid  on  the  desirabihty  of 
discriminating  in  regard  to  the  incidence  of 
charges,  rather  than  seeking,  as  has  hitherto 
been  the  practice,  to  throw  all  classes  of  charge 
into  one  common  collection  of  shop  expenditure, 
and  then  to  average  down  the  whole  per  unit 
of  time  or  wages. 

It  might  be  supposed  that  the  steps  neces- 
sary to  do  this  were  very  difficult  and  cumbrous. 
This  is  not  the  case,  unless  indeed  at  the  outset. 
Once  roughed  out  and  the  various  factors  deter- 
mined, the  subsequent  steps  present  no  special 
difficulty.  It  will  be  useful  to  bear  always  in 
mind  the  illustration  already  given  of  the  "little 
shops,"  forming  part  of  a  large  mill  and  rented 
out  to  weekly  or  monthly  tenants.  If  we  fol- 
low the  lines  that  would  of  necessity  be  followed 
by  a  landlord  of  such  a  building  in  order  to  the 

79 


# 


■.  1 


ii 


\\l 


80        THE  DISTRIBUTION  OP  EXPENSE  BURDEN 

fair  proportionment  of  rents,  we  shall  not  be 
far  out  of  our  course. 

•^  The  first  item  to  be  dealt  with  would  probably 
be  the' building.  For  the  sake  of  simplicity, 
we  may  assume  that  this  is  of  one  story  only. 
There  is,  of  course,  no  difference  in  principle 
whether  the  building  be  one  or  several  stories 
high.  As  a  matter  of  fact  this  method  was  first 
worked  out  for  and  applied  to  a  factory  which 
consisted  of  two  parts,  one  being  an  old  build- 
ing of  five  stories,  and  the  other  a  modem  shop 
of  three.  The  process  is  the  same  in  any  case. 
All  the  factors  of  capital  and  revenue  incident 
on  such  buildings  are  carefully  mapped  out. 
la-The  capital  invested  in  land  has  first  place.  To 
this  is  added  the  6ost  of  the  building.  Partic- 
ular care  is  taken  to  consider  whether  any  ine- 
qualities in  cost  in  the  various  parts  of  the  latter 
are  significant  or  accidental — that  is,  whether 
they  have  any  special  reference  to  the  uses  ol 
that  part.  Having  exhausted  the  capital  items 
they  are  reduced  to  floor  areas.  That  is  to 
say,  every  square  foot  of  floor  space  not  sub- 
ject to  special  conditions  is  considered  a?  repre- 
senting so  much  capital  outlay.  Having  deter- 
mined this,  the  charges  incident  on  the  floor 
spac^  due  to  this  capital  outlay  are  ascertained, 
then  interest,  jjound  rent,  if  any,  taxes,  insur- 


CLASSIFYINQ  AND  DISSECTING  SHOP  CHARGES   81 

; 
ance,  depreciation  of  buildings — all  are  reduced 

to  figures,  and  therefore  to  so  many  dollars  or 

pounds  per  square  foot  of  floor  area.    The 

' '  first  cost  and  working  expenses  of  heating  and 

ventilating  appliances  are  treated  on  a  similar 

footing. 

When  this  is  finished,  with  any  factors  pecu- 
liar to  the  local  circumstances  taken  to  account, 
we  have  obtained  a  pretty  close  idea  of  what  rent 
charge  is  due  to  a  production  centre  occupjring 
say  13  square  feet  of  working  space.  Whether 
we  are  determining  the  figures  for  the  purposes 
of  subletting  our  building  or  for  determining 
the  correct  incidence  of  such  items  of  expense 
in  a  large  shop,  makes  no  difference  whatever 
to  the  process  or  its  result.  So  many  square 
feet  of  floor,  so  many  dollars  per  annum  out 
of  pocket.  If  machine  A  occupies  twice  the 
space  of  machine  B,  it  is  costing  us  just  twice 
as  much  to  house  it.  There  seems  to  be  no 
escape  from  or  alternative  to  this  position. 

Where  shops  are  electrically  lighted  by  over- 
5  head  Ughts,  the  cost  of  this  also  is  reduced  to  a 
floor-area  basis.  The  items  include: — charges ^-^^ 
due  to  the  capital  sunk  in  leads,  switches,  lamps, 
and  in  some  cases  where  the  fight  is  generated 
on  the  premises,  a  due  proportion  of  the  cost 
of  the  generating  plant;  interest,  insurance, 


i 


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1 '  I 


m 


82        THE  DISTRIBUTION  OP  EXPENSE  BURDEN 

and  depreciation  is  taken  out  on  these  sums,  and 
to  the  result  is  added  the  actual  cost  of  power  of  ^ 
current,  carbons,  cleaning,  and  so  forth.  Here 
again  we  get  a  rent  representing  the  cost  of 
lightmg  either  one  of  our  little  shops  or  a  given 
area  of  a  large  shop. 

Two  items  are  thus  complete — first,  a  rent  for 
the  empty  shop  or  area,  second,  the  rent  of  the 
same  lighted  up.    The  shop  is,  in  fact,  ready 
for  occupation  and  use. 
4    Probably  the  cost  of  power  will  be  the  next 
item  dealt  with.    This  is  a  more  complex  sub- 
ject, still  not  insuperably  so.    The  capital  out^^ 
lay  on  engines,  boilers,  motors  and  generators, 
main  shafting,  and  pulleys  being  ascertamed, 
and  the  resultmg  revenue  charge  therefrom, 
to  this  is  added  the  running  expenses— fuel,  ^v 
stoking,  repairs,  and  so  forth,  reduced  to  a 
value  per  horse-power  hour.    There  is  not  much 
difficulty  in  the  broad  working  out  of  this 
figure,  but  the  position  of  shops  and  various 
local  details  make  the  problem  a  httle  trouble- 
some.   In  some  cases  the  cost  of  power  might 
not  be  the  same  in  all  parts  of  a  large  mill  or 
scattered  group  of  shops.    This  is  a  matter  of 
which  the  practical  aspect  will  vary,  and  no 
definite  rulings  are  possible.    It    is    evident 
that  in  many  cases  the  charge  for  power  should 


CLASSIFYING  AND  DISSECTING  SHOP  CHARGES   83 

not  be  averaged.  The  cost  of  transmitting 
power  to  a  distant  shop  might  sometimes  give 
rise  later  to  the  adoption  of  more  efficient  means 
of  transmission,  and  this  should  of  course  show 
in  the  charges  of  that  particular  shop  alone, 
and  not  reduce  the  average  cost  of  power  in 
other  places  which  have  nothing  to  do  with  the 
improvement.  In  most  cases,  however,  the  aver- 
age charge  per  horse-power  hour  would  meet 
the  case  fully. 

The  shops  are  now  ready  for  the  introduction 
of  machines.  ,, 

I.   The  charge  due  to  interest,  depreciation,  and 
insurance  on  the  value  of  machines  is  of  course 
the  item  which  the  new  method  has  in  common 
with  the  ordinary  machine-rate  plan.    These 
charges  are  calculated  per  annum  and  then 
reduced  to  a  rate  per  hour,  based  on  the  prob- 
able number  of  hours  the  machine  will  be  in 
work  under  normal  conditions.    Thus,  if  we 
take  the  annual  work  of  any  machine  to  be 
2,500  hours,  and  the  annual  charge  for  interest, 
depreciation,  and  insurance  to  be  $150,  this 
gives  an  hourly  rate  for  these  items  of  6  cents. 
The  ordinary  machine  rate  being  extensively 
understood  at  the  present  day,  this  particular 
item  need  not  detain  us  farther.    It  should 
be  noted,  however,  that  the  items  of  annual  or 


AN 


•■!«• 


\>^ 


84        THE  DISTRIBUTION  OF  EXPENSE  BURDEN 

hourly  charge  for  interest,  depreciation,  and 
insurance  do  not  form  the  whole  machine  rate 
as  in  the  old  method,  but  are  one  of  many  fac- 
tors, of  which  several  have  already  been  de- 
scribed. The  new  method  includes  all  that  was 
signified  by  the  old  machine  rate,  and  several 
other  items  as  well. 

It  should  be  mentioned  that  along  with  each 
machine  are  included  countersnafts,  fencing, 
belting,  or  motors,  which  are  specially  used  to 
operate  that  machine  alone.  Some  care  is  nec- 
essary to  discriminate  between  what  may  belong 
to  individual  machines  and  what  pertains 
more  properly  to  the  main  system  of  power 
transmission. 

In  addition  to  the  empty  shop  lighted  and 
heated,  with  its  necessary  main  system  of  power, 
we  have  now  considered  the  machines  installed 
and  ready  for  working.  It  will  be  evident  that 
up  to  this  point  the  charge  incident  on  the  work 
done  on  any  machine  will  be  made  up  of: — (1), 
a  rent  charge  for  the  space  occupied;  (2),  a 
charge  for  the  capital  simk  in  the  machine  it- 
self; and  (3),  a  charge  for  power  calculated 
according  to  the  average  amount  used  by  the 
machine.  None  of  these  items  can  be  imagined 
as  being  other  than  properly  connected  with  the 
particular  work  done  on  any  given  machine,  or  as 


CLASSIFYING  AND  DISSECTING  SHOP  CHARGES   85 

having  on  the  other  hand  any  connection  with 
work  done  on  other  machines,  whether  they 
happen  to  be  fixed  under  the  same  roof  or  not. 
We  have,  in  fact,  not  so  much  differentiated  as 
kept  separate  these  factors  of  production  cost, 
which  on  the  ordinary  methods  of  averaging 
shop  charges  are  jumbled  up  in  one  common 
account. 

There  remain,  however,  other  items  perhaps 
not  so  definite,  but  yet  capable  of  being  worked 
out  into  reasonable  approximations  to  the  truth. 
5  Of  these  are  the  cost  of  overlooking  and  super- 
vision, which  are  frequently  special  to  a  limited 
group  of  machines,  as,  for  example,  in  the  case 
of  a  subforeman  in  charge  of  a  half-a-dozen 
screw-maJdng  machines  or  turret  lathes.    The 
approximate  cost  of  such  supervision  for  a  year 
can  be  taken,  divided  by  the  number  of  ma- 
chines, and  reduced  to  an  hourly  rate  per  ma- 
chine.   The  importance  of  confining  a  special 
charge  of  this  kind  to  just  that  class  of  work  that 
incurs  it,  instead  of  letting  it  be  part  of  a  general 
shop  charge  and  thus  become  spread  over  all 
the  work  of  the  shop,  will  be  clear.    The  same 
result  might,  of  course,  be  attained  by  a  very 
elaborate  system  of  allocating  such  overlookers' 
time  on  a  cost  sheet,  but  this  would  be  much 
more  troublesome  and  not  appreciably  more 


I 


II 


fi 


86        THE  DISTRIBUTION  OF  EXPENSE  BURDEN 

accurate  than  the  plan  proposed.  It  would  be, 
in  fact,  less  accurate,  as  will  be  seen  when  the 
question  of  partially-idle  groups  of  machines  is 
considered  in  the  chapter  on  mass  production. 
>  The  cost  of  tools  may  in  some  special  cases  be 
similarly  treated,  as  for  example  the  wheels  on 
emery  machines,  cutters  on  milling  machines, 
etc.  This  requires  very  cautious  treatment. 
The  same  remark  applies  to  diarges  for  oil,y 
or  other  material  such  as  rouge^^used  in  partic- 
ular processes.  Such  materials  frequently  form 
a  very  serious  item  in  the  true  cpst  of  a  process, 
and  the  justice  of  including  them  in  the  working 
expenses  of  a  production  centre  will  be  felt  if 
the  case  of  the  separate  little  shops  is  consid- 
ered. The  expenses  of  such  a  httle  shop  doing 
polishing  work  by  means  of  a  buff  wheel  will 
be  readily  allowed  to  be  made  up  of  the  standing 
charges  already  detailed  plus  the  value  of  actual 
emery  flour,  rouge,  etc.,  consumed  on  the  work. 
And  that  substantial  accuracy  is  attained  by 
reducing  such  item  of  expense  to  a  charge  per 
working  hour  will  be  admitted  if  we  assume,  as 
we  are  entitled  to,  that  the  same  machine  em- 
ployed on  the  same  class  of  work  uses  approxi- 
mately in  proportion  to  the  amount  of  work  got 
through.  If  from  the  evident  circumstances 
of  the  case  this  were  not  so,  then  other  arrange- 


CLASSIFYING  AND   DISSECTING   SHOP   CHARGES    87 

ments  would  be  necessary.  The  rate  might, 
for  example,  be  higher  when  engaged  on  one 
class  of  work  than  for  another.  It  has  already 
been  stated  that  an  item  of  this  class  requires 
very  careful  consideration. 
/The  principal  items  of  shop  expenditure  are 
now  accoimted  for.  Those  remaining  comprise 
the  wages  of  general  foremen,  and  the  cost  of 
repairs  done  to  the  buildings,  to  power,  trans- 
mitting, lighting,  and  heating  plant,  and  to  the 
machines  themselves.  This  latter  question,  be- 
ing mixed  up  with  that  of  depreciation,  needs 
some  discussion. 

The  usual  view  taken  of  a  depreciation  rate  is 
that  it  is  a  fixed  percentage,  say  5  per  cent,  on 
a  gradually  lessening  value.  The  effect  of  this 
is  to  transfer  the  cost  of  a  machine  from  the 
plant  account  at  the  outset  of  its  career  to  the 
depreciation  fund  at  the  end  of  its  life.  The 
value  of  the  machine,  if  plotted  graphically, 
would  show  a  series  of  intermediate  values 
year  by  year,  each  rather  less  than  that  of  the 
previous  year.  From  a  financial  point  of  view 
this  is  correct.  As  the  machine  wears  out  its 
value  as  an  asset  decreases,  and  the  provision 
for  its  renewal  in  the  depreciation  account 
increases.  It  is  usually  understood  that  the 
cost  of  minor  repairs  during  working  life  is  being 


/ 


88        THE  DISTRIBUTION  OF  EXPENSE  BURDEN 

met  out  of  revenue.  Therefore  such  repairs  are 
properly  a  shop  charge.  Repairs  or  alterations, 
on  the  other  hand,  which  practically  give  the 
machine  a  new  lease  of  life,  should  be  charged 
to  plant  account,  wholly  or  partially,  according 
to  circumstances. 

The  question  which  interests  us  here  is: — 
How  should  the  cost  of  repairs  which  are  met 
out  of  revenue  be  dealt  with  under  the  new 
method?  It  is  evident  that  they  can  be  either 
kept  isolated  from  all  others  and  in  connection 
with  the  particular  machine  or  item  of  plant 
that  has  incurred  them,  or  else  be  treated  as  a 
really  general  shop  charge,  such  as  foreman's 
wages. 

The  principle  of  the  new  method  being  to 
keep  all  expenditure  individualized,  wherever  it 
can  be  done,  it  follows  that  arrangements  must 
be  made  to  give  the  cost  of  repairs  expression 
in  the  various  rate  factors  which  go  to  make 
up  the  total  new  machine  rate. 

As  the  charging  of  repairs  is  always  an  ex 
post  facto  transaction — that  is,  the  work  done 
by  reason  of  which  the  repairs  have  become 
necessary  cannot  possibly  be  charged  with 
them — ^it  will  serve  the  purpose  if  such  repairs 
be  averaged  over  half-yearly  periods,  though 
still   kept   confined    to   the   actual   machines 


f 


CLASSIFYING  AND  DISSECTING  SHOP  CHARGES   89 

involved.  Thus,  if  the  power  plant  has  been 
overhauled,  the  rent  charge  for  power  may  be 
correspondingly  increased  at  the  next  half- 
yearly  balance,  until  such  extra  and  abnormal 
expenditure  has  been  wiped  out.  Generally, 
therefore,  it  will  be  seen  that  an  estimated 
figure  for  cost  of  repairs  is  included  in  the  vari- 
ous factors  of  the  new  machine  rate,  and  this 
estimated  charge  is  subject  to  periodical  revi- 
sion, if  on  examination  it  is  found  to  be  too 
high  or  too  low. 

It  may  be  objected  here  that  we  are  here 
breaking  away  from  actual  figures,  and  entering 
the  nebulous  region  of  estimated  charges,  which 
it  is  the  purpose  of  the  modem  methods  of 
accounting  to  avoid.  The  answer  is  that  the 
breaking  away  is  only  temporary,  and  that  the 
cost  of  repairs  is  more  properly  averaged  over  a 
more  or  less  extended  period  than  borne  by 
any  particular  month  in  which  they  may  happen 
to  have  been  executed.  And  when  it  is  remem- 
bered that  the  alternative  to  this  method  of 
averaging  is  the  throwing  of  the  cost  of  such 
repairs  into  the  general  fund  of  shop  repairs, 
and  spreading  it  over  the  work  done  in  a  given 
month,  with  which  it  has  manifestly  no  proper 
connections,  the  propriety  of  the  plan  advocated 
will  not  be  in  doubt.    By  this  means,  the  cost 


90        THE  DISTRIBUTION  OF  EXPENSE  BURDEN 

of  repairs  to  a  turret  lathe,  for  example,  is  kept 
incident  on  the  work  of  that  turret  lathe  and 
no  other;  and  as  no  particular  item  of  the  cur- 
rent work  can  by  any  possibility  be  imagined  to 
bear  properly  the  burden  of  such  repairs,  no 
substantial  injustice  is  done  by  a  temporary 
want  of  coincidence  between  the  actual  rate  of 
expenditure  in  repairs  and  the  estimated  rate. 
On  the  other  hand,  the  individualizing  principle 
is  kept  intact,  and  thia  is  the  more  important 
object  to  keep  in  view. 

Necessarily,  the  estimate  for  repairs  included 
in  the  new  machine  rates  must  be  no  hastily 
determined  or  fancy  figiu-e.  Throughout  this 
method  the  preliminary  determinations  must 
be  most  carefully  made.  If /this  is  done,  then 
their  subsequent  variation  WiU  be  an  easy  and 
almost  automatic  matter.  If  we  recur  to  the 
case  of  the  little  shops,  the  justice  of  the  fore- 
going contentions  will  be  more  clearly  seen.  It 
is  evident  that  the  cost  of  repairs  to  any  one* 
machine  is  part  of  the  expenses  of  the  littlej 
shop  it  is  in.  But,  ag^tin,  it  would  not  he\ 
correct  to  charge  with  the  extra  cost  the  work 
which  happened  to  be  done  in  a  week  or  month 
in  which  such  repairs  were  carried  out.  More 
substantial  justice  would  be  done  by  estimating 
in  advance  the  probable  expenditure,  and  includ- 


CLASSIFYING  AND  DISSECTING  SHOP  CHARGES   91 

ing  that  in  the  hourly  rate  charged  on  the  work. 
Then,  if  at  the  end  of  a  six-months'  period  it 
was  found  that  this  amount  had  been  under- 
estimated, the  small  amount  representing  the 
difference  between  what  was  actually  spent 
and  what  was  charged  to  jobs  as  an  estimated 
figure  would  be  adjusted  by  raising  the  rate 
slightly. 

The  question  of  repairs  done  to  the  power 
plant  or  to  the  buildings  of  the  little  shops 
seems  to  present  more  difficulties.  It  seems 
clear  that  the  landlord  could  not  charge  more 
for  power  or  for  rent  because  he  had  just  spent 
a  certain  sum  in  repairs,  merely  to  keep  up  the 
efficiency.  On  reflection  this  will  be  seen  to 
strengthen  the  case  for  the  averaging  method. 
For  the  reason  why  no  more  rent  could  be 
charged  is  that,  in  fixing  the  rent  in  the  first 
instance,  the  probability  of  a  certain  expendi- 
ture for  repairs  was  foreseen  and  allowed  for. 
It  was,  in  fact,  averaged  in  advance.  And  any 
discrepancy,  any  failure  to  estimate  correctly 
the  probable  cost  of  repairs  would,  in  the  land- 
lord's case,  come  out  of  his  profit.  It  would 
be  a  dead  loss  to  him.  In  the  case  of  a  large 
shop,  however,  there  being  no  item  correspond- 
ing to  the  landlord's  profit  to  fall  back  on,  the 
recovery  of  this  unforeseen  expenditure  from 


1 

V-  J 


,  1 . 


r, 


1^: 


92        THE  DISTRIBUTION  OP  EXPENSE  BURDEN 

the  shop  is  the  only  course  open.  It  must  be 
got  rid  of  by  becoming  an  expense  chargeable 
to  work,  and  this  is  done  simply  enough  by 
raising  the  rent  charge  per  floor  area,  in  the  case 
of  repah^  to  buildings,  or  per  horse-power  hour, 
in  the  case  of  the  power  plant. 

The  treatment  of  all  these  items  is  thus  iden- 
tical, whether  we  are  considering  the  little  shops 
or  a  number  of  productive  centres  in  a  large 
shop.  It  will  be  necessary  now  to  consider  the 
case  of  those  charges  which  have  no  parallel 
in  the  Uttle  shops,  such  as  foremen's  wages, 
which  press  equally  on  a  number  of  productive 
centres. 

As  there  is  no  natural  line  of  cleavage  herein, 
no  reasonable  presumption  in  favor  of  such 
items  being  connected  with  one  productive  cen- 
tre more  than  with  another,  we  are  compelled 
to  treat  them  as  really  belonging  to  the  cate- 
gory of  general  or  non-individual  shop  charges, 
and  thus  to  distribute  them  over  the  work  as  a 
whole,  on  the  hourly-burden  plan  for  prefer- 
ence. The  principle  of  this  method  has  already 
been  explained,  and  there  is  nothing  special  in 
the  treatment  of  these  general  items  which 
differentiates  them  from  the  ordinary  distribu- 
tion of  shop  charges  by  hourly  burden.  When 
all  the  machines  or  production  centres  are  run- 


CLASSIFYING  AND  DISSECTING  SHOP  CHARGES   93 

ning  full  time,  there  is  nothing  in  the  shop- 
charges  account  to  distribute  but  non-individual 
items.  All  the  rest  will  have  been  already  allo- 
cated to  particular  jobs  by  means  of  the  new 
machine  rates. 

It  is  when  this  is  the  case  that  the  differences 
between  the  present  method  and  any  previous 
one  are  seen  at  the  full.  Out  of  all  the  many 
items  of  expenditure  going  to  make  up  the 
ordinary  shop-charges  account,  which  are  usu- 
ally lumped  together  and  spread  like  a  thin 
paste  equally  over  all  jobs  in  strict  proportion 
to  time  occupied  only,  we  find  but  one  or  two 
items,  themselves  of  relatively  small  amount, 
remaining  to  be  treated  in  this  way.  All  the 
main  items  of  expenditure,  by  following  the 
natural  lines  of  action,  have  been  kept  immedi- 
ately connected  with  the  machines  and  there- 
fore with  the  jobs  done  on  such  machines,  on 
which  they  are  properly  incident.  The  large 
and  expensive  machine  bears  its  own  burden; 
so  does  the  small  and  cheap  machine.  Their 
vicinity  in  the  same  shop  does  not  have  the 
effect  of  altering  each  other's  shop-charge  inci- 
dence. The  introduction  of  a  special  over- 
looker on  a  small  group  of  machines  does  not 
send  up  the  hourly  burden,  and  thus  affect  the 
work  of  the  whole  shop;  it  is  confined  in  its 


94        THE  DISTRIBUTION  OP  EXPENSE  BURDEN 

effect  to  the  machines  and  their  work  on  which 
the  increased  expenditure  was  actually  incurred. 
Throughout  the  items  of  expenditure  have  been 
not  so  much  individualized  as  kept  individual- 
ized, and  thus  preserved  from  mutual  inter- 
ference—just as  much  as  if  they  were  actually 
as  well  as  hypothetically  incurred  in  separate 
little  shops.    It  would  be  hard  to  argue  that 
this  is  not  a  decided  gain  or  that  it  is  not  worth 
the  trouble  involved,  whatever  that  may  prove 
to  be.    If  it  is  worth  while  attempting  to  con- 
nect estabhshment  expenditure  with  work  at  all, 
it  is  certainly  worth  doing  so  in  a  way  which 
closely  represents  actual  facts. 

Having  thus  considered  in  some  detail  the 
mfethod  of  organizing  the  shop  charges  on  the 
new  method,  with  the  result  that  it  is  demon- 
strated that  when  all  the  productive  centres 
are  making  full  time  the  great  bulk  of  shop 
expenditure  finds  its  way  to  the  actual  jobs  on 
which  it  has  been  incurred,  it  remains  to  show 
what  happens  when  there  is  a  large  proportion 
of  idle  time  in  the  shops.  In  such  case,  while 
the  work  actually  going  through  will  be  charged 
as  before  with  its  due  expense,  there  will  obvi- 
ously remain  at  the  end  of  the  month  a  certain 
amount  of  undistributed  charges,  exactly  pro- 
portional to  the  idle  time  of  the  various  produc- 
tive centres. 


CLASSIFYING  AND  DISSECTING  SHOP  CHARGES   95 


This  balance,  together  with  the  really  general 
(or  non-individual)  shop  charges,  remains  to  be 
got  rid  of.  This  is  effected  by  means  of  an 
hourly-burden  rate.  There  are  thus,  under  the 
new  system,  two  rates  which  enter  into  the  cost 
of  each  job:  1,  the  new  machine  rate,  which 
remains  the  same  whether  the  shop  be  busy  or 
slack;  and  2,  the  hourly-bm-den  rate,  which  it 
is  proposed  to  call  the  "supplementary  rate," 
since  by  its  aid  we  spread  away  all  the  residual 
charges,  which  would  otherwise  escape  allot- 
ment. This  rate  necessarily  rises  when  there 
is  a  large  proportion  of  idle  machines,  and  falls 
when  idleness  is  at  a  minimum.  The  supple-,, 
mentary  rate  thus  becomes  a  significant  index 
to  the  commercial  efficiency  of  the  shop.  It 
should  be  the  aim  of  the  authorities  to  keep  the 
rate  as  low  as  possible.  Its  rise  when  work  is 
plentiful  will  be  a  sign  of  the  most  automatic 
nature  that  something  is  going  wrong. 

It  may  occur  to  the  reader  that  the  more 
appropriate  way  of  dealing  with  idle-machine 
time  would  be  to  distribute  the  unallotted  ma- 
chine-rate amounts,  not  as  part  of  the  general 
shop  expense,  but  as  a  kind  of  supplementary 
machine  rate,  thus  confining  the  effect  of  idle- 
ness to  the  particular  machine  in  fault.  This 
would  certainly  be  the  ideal  method,  but  it  is 


<f» 


ii 


06         THE  DISTRIBUTION  OP  EXPENSE  BURDEN 

not  practicable  under  ordinary  circumstances; 
the  reason  being  that  if  a  machine  were  to  work 
only  one  hour  in  a  given  month,  all  the  burden 
of  the  other  two-hundred-and-odd  hours  would 
be  discharged  on  the  unfortimate  job  done  in 
that  one  hour.  And  worse  still,  if  no  work  at 
all  were  done  in  the  month  the  unallotted  rate 
would  either  be  lost  altogether,  or  else  thrown 
into  the  supplementary  shop  rate  after  all.  We 
are  obliged  therefore,  from  motives  of  expedi- 
ency, to  look  upon  idle  time  as  a  kind  of  visita- 
tion of  Providence  which  the  whole  shop  ought 
to  bear. 

It  is  true,  no  doubt,  that  we  do  here  depart 
from  the  parallel  case  of  the  httle  shops,  by 
which  we  have  endeavored  to  be  guided.  In 
their  case,  the  accumulated  burden  due  to 
slack  times  would  have  to  be  borne  by  what- 
ever work  was  done  in  the  month;  but  then  in 
the  extreme  case  of  an  almost  complete  idleness 
for  a  long  period,  such  as  a  month,  it  would 
probably  be  a  case  of  bankruptcy  for  the  little 
shop.  This  alternative,  as  in  the  former  case 
of  the  landlord's  profit,  has  no  parallel  in  the 
case  of  a  large  shop  embracing  many  productive 
centres.  The  shop  as  a  whole  properly  comes 
to  the  rescue  of  the  idle  machine  and  shifts  the 
unallotted  burden  onto  its  broader  shoulders. 


CLASSirYING  AND  DISSECTING  SHOP  CHARGES   97 


The  full  effect  of  the  new  method,  as  con- 
trasted with  the  older  averaging  methods,  such 
as  either  the  percentage-on-wages  or  the  hourly- 
burden  plan,  may  be  glanced  at.  Briefly,  it 
may  be  said  that  in  all  three  the  whole  of  the 
charges  incurred  in  the  month  is  spread  over 
the  work  done  in  that  month.  But  whilst  in 
the  two  former  the  distribution  is  on  an  arbi- 
trary basis,  in  the  new  method  the  greater 
bulk  of  the  charges  allocated  to  a  job  are  really 
what  have  been  incurred  under  the  actual  con- 
ditions. If  these  conditions  are  varied,  then 
although  the  number  of  hours  or  the  direct 
wages  may  still  remain  the  same,  the  amount 
debited  to  the  job  for  shop  charges  will  not 
remain  the  same.  They  will  vary  exactly  in 
proportion  as  the  resources  called  on  to  effect 
the  variation  are  more  or  less  expensive  than 
before.  On  the  two  older  methods  they  would 
not  vary,  provided  the  time  or  wages  value 
remained  xmchanged. 

Again,  in  the  new  machine  rate  we  do  get 
a  factor  of  cost  which  is  just  as  significant  as 
the  wages  itself.  It  is  a  factor  which  varies 
as  method  varies.  Cheaper  methods  of  doing 
work  will  be  promptly  reflected  in  this  factor. 
And  the  significance  of  the  supplementary  rate 
has  already  been  alluded  to. 


«l 


V 


I  i 


^ii- 


98 


THE  DISTRIBUTION  OF  EXPENSE  BURDEN 


In  comparing  two  costs  on  the  new  method, 
we  have  three  factors  to  read,  each  of  which 
conveys  special  information: — 1,  direct  wages; 
nothing  need  be  said  about  this;  2,  the  machine 
rate;  this  will  show  whether  a  change  of  method 
or  process  has  resulted  in  an  economy  if  read 
in  connection  with  wages.  If  cost  has  varied, 
it  is  easy  to  see  wherein  it  has  varied — the  play 
of  the  three  factors  of  time,  wages,  and  machine 
rents  being  distinguishable — and  deductions  can 
be  drawn  whether  there  has  been  a  net  gain  or 
loss  by  the  change  of  method.  For  it  will  be 
seen  that  a  decrease  in  wages  may  be  counter- 
balanced by  a  rise  in  machine  rent,  or  the  shorter 
time  taken  by  a  high-priced  man  may  be  found 
to  have  a  corresponding  gain  in  a  lower  charge 
for  machine  rent.  In  fact,  as  before  said,  the 
play  of  the  factors  amongst  themselves  and  their 
mutual  relationships  can  be  studied  minutely. 
This  is  impossible  on  any  of  the  averaging 
methods. 

Finally,  there  is  the  supplementary  rate,  the 
third  factor  of  cost.  This  will  be  of  chief  signifi- 
cance as  showing  what  proportion  of  the  total 
cost  was  due  to  the  accidental  features  of  the 
commercial  situation  at  any  period.  This  fac- 
tor has  never  been  separated  before  from  the 
general  body  of  the  costs.    On  an  averaging 


CLASSIFYING  AND  DISSECTING  SHOP  CHARGES     99 

system,  if  we  find  a  reduced  cost  today  as  against 
the  cost  of  the  same  article  a  year  ago,  we  can- 
not, if  the  method  has  in  the  meantime  been 
varied,  say  what  is  the  reason  of  the  reduction. 
The  manufacturing  efficiency  due  to  method 
was  intermixed  with  the  commercial  efficiency 
due  to  state  of  trade.  In  the  new  method,  the 
state  of  trade  or  the  general  efficiency  of  man- 
agement affect  the  supplementary  rate  alone, 
and  a  sunilar  cost  at  two  different  periods 
might,  if  analyzed,  show  that  what  had  been 
gamed  in  method  had  been  neutralized  by  a 
fall  in  the  volume  of  trade,  or  by  a  muddled 
condition  of  shop  organization. 

In  the  next  chapter  some  of  the  problems 
raised  by  the  application  of  the  method  to  mass 
production  will  be  discussed,  especially  with 
regard  to  the  influence  of  nearly  automatic 
machmes.  One  or  two  examples  of  job  costs 
under  varying  conditions,  and  the  lesson  that 
may  be  read  from  an  examination  of  them,  will 
be  presented. 


;  t 


1 


I: 


n 


M 

n 


MASS  PRODUCTION  AND  THE  NEW 
MACHINE  RATE. 


i 


^■J1 


1-'"  J 


I 


Chapter  V. 

MASS  PRODUCTION  AND  THE  NEW 
MACHINE  RATE. 

TTITHERTO  the  case  of  an  ordinary  engi- 
"■-  •*■  neering  shop  has  been  under  discussion, 
in  which  each  production  centre  is  in  charge  of 
an  operator,  whose  wages  form  a  separate  item 
of  cost.  We  have  now  to  regard  the  case  of 
factory  production,  in  which  it  may  not  be 
profitable  or  necessary  always  to  be  taking  out 
cost,  because  there  is  here  not  so  much  a  ques- 
tion of  separate  jobs  each  different  from  the 
other,  as  of  batches  or  lots  of  similar  or  closely 
similar  articles  going  through  time  after  time 
without  variety  in  pattern. 

It  is  also  in  connection  with  this  class  of  work 
that  we  usually  meet  the  automatic  or  nearly 
automatic  machine,  which  introduces  new  diffi- 
culties into  the  question  of  costing,  if  not  of 
shop  charges.  Take  for  instance  the  case  of  a 
group  of  small  turret  machines  making  some 
particular  piece,  for  which  the  call  is  not  abso- 
lutely constant.    We  will  assume  that  there  are 

103 


\f 


h. 


w 


f 


u 


104      THE  DISTRIBUTION  OF  EXPENSE  BURDEN 

five  machines  in  the  group,  under  the  charge  of 
one  man,  who  sets  tools  and  attends  to  all  the 
wants  of  the  process.  Some  of  the  machines 
are  always  running,  but  the  number  varies 
from,  say,  three  to  the  full  five.  What  is  the 
cost  of  the  work  under  these  varying  circum- 
stances, and  what  the  proper  incidence  of  shop 
charges?  The  usual  plan  of  taking  out  prime 
cost  by  means  of  time  sheets  evidently  fails 
here,  since  this  would  lead  to  the  same  job  being 
charged  with  ^  of  the  man's  time  today  when 
he  was  working  three  machines,  and  with  only 
i  tomorrow  when  all  five  happen  to  be  working. 
It  is  evident  that  this  result  is  worthless  for 
any  practical  purpose.  And  when  it  is  con- 
sidered that  different  articles  may  be  running 
on  each  of  the  five  machines,  or  three  alike  and 
two  separate,  or  indeed  any  possible  combina- 
tion of  five  niunbers,  the  confusion  is  still  worse. 
The  costs  become  quite  meaningless. 

Not  so  however  with  the  new  machine  rate. 
As  far  as  any  particular  job  is  concerned  it  is 
a  matter  of  indifference  if  one,  two,  or  all  the 
five  machines  are  in  operation  simultaneously. 
Whatever  work  is  done  receives  it!  due  debit 
of  charges  strictly  in  proportion  to  the  time  it 
takes.  It  is  not  even  necessary  that  all  the 
machines  be  exactly  alike.    One  of  the  five  may 


J 


MASS  PRODUCTION  AND  THE  BIACHINE  RATE     105 

be  a  larger  machine  with  a  correspondingly 
higher  rent  charge.  This  matters  nothing;  just 
so  much  work  as  is  done  is  burdened  with  its 
own  proportion  of  machine  rate,  and  therefore 
with  its  share  of  shop  charges,  quite  irrespective 
of  whether  the  other  four  are  idle  or  working. 
As  has  already  been  explained,  the  idle  time  on 
each  machine  falls  into  the  supplementary  rate. 

It  matters  not,  therefore,  from  the  point  of 
view  of  the  distribution  of  shop  charges  through 
the  new  machine  rate,  whether  the  machines 
are  automatic  or  not.  An  automatic  machine 
is  still  responsible  for  rent,  interest,  floor  bur- 
den, cost  of  power,  working  expenses  for  oil, 
or  other  process  supplies,  just  as  an  ordinary 
hand-operated  machine  is.  And  there  is  no 
difference  in  the  method  of  determining  these 
charges.  If  a  hand  machine  were  to  be  made 
automatic  it  would  not  alter  the  rate,  except 
in  so  far  as  the  alteration  might  have  happened 
to  alter  some  of  the  factors.  If  these  were  not 
altered  at  all,  then  the  rate  would  also  be  unal- 
tered. 

But  this  does  not  get  over  the  difficulty  of 
the  direct  wages  allocation.  The  prime  cost 
is  compHcated  by  the  change,  imdoubtedly. 
Every  machine,  however  automatic,  does  un- 
questionably take  up  some  part  of  a  man's 


106      THE  DISTRIBUTION  OF  EXPENSE  BURDEN 

time,  and  the  important  point  for  cost-accoimt 
purposes  is  to  know  what  is  the  usual  amount 
of  time  so  taken  up.  In  the  ease  of  a  small 
automatic  hack-saw,  where  the  time  occupied 
in  changes  is  inconsiderable  relative  to  the 
length  of  the  process,  no  substantial  injustice 
would  be  done  by  neglecting  the  wages  factor 
altogether.  But  though  this  might  answer  in 
the  case  of  an  isolated  machine,  it  certainly 
would  not  be  fair  where  several  machines  are  in 
question;  and  where  the  automatic  machine  is 
in  the  direct  Une  of  the  process-work,  it  is  evi- 
dent that  the  wages  difficulty  must  be  solved. 

The  plan  advocated  here  involves  perhaps 
considerable  breaking  away  from  traditions. 
Briefly  speaking,  it  is  proposed  in  the  case  of 
automatic  machines  to  consider  wages  of  attend- 
ance as  a  factor  of  the  new  machine  rate,  based 
on  the  maximum  number  of  machines  that  can 
be  worked  simultaneov^sly  under  the  most  favor- 
able conditions. 

If,  for  example,  we  have  a  group  of  five 
automatic  machines,  capable  of  being  operated 
simultaneously  by  one  man,  at  $10  per  week, 
we  consider  the  proper  labor  charge  per  machine 
per  week  to  be  $2,  which  is  equivalent  to  an 
hourly  rate  of  4  cents  for  each  machine.  This 
4  cents  is  added  to  and  made  part  of  the  new 


MASS  PRODUCTION  AND  THE  MACHINE  RATE     107 

machine  rate  in  each  case.  It  follows,  of  course, 
from  this  that  if  one  or  more  of  the  machines 
are  idle,  the  unallotted  wages  fall  into  the  sup- 
plementary rate  along  with  other  shop  charges. 
The  plan  of  treating  the  wages  on  automatic 
machines  as  one  element  in  the  shop  charges, 
and  therefore  suppressing  their  separate  exist- 
ence as  an  element  of  prime  cost,  is  justifiable  on 
several  groimds.  Whether  machines  are  work- 
ing or  idle  is  a  matter  of  general  shop  economy, 
varying  according  to  the  commercial  situation 
or  the  efficiency  of  organization.  Now,  within 
very  wide  limits  where  groups  of  automatic 
machines  are  concerned,  it  is  fairly  evident  that 
under  conditions  of  varying  commercial  effi- 
ciency, the  number  of  machines  in  operation 
at  any  one  time  will  vary  from  day  to  day, 
but  not  the  wages  bill.  Therefore  we  shall  not 
be  far  wrong  in  assuming  that  the  adverse 
conditions  due  to  slackness  are  more  properly 
thrown  upon  the  supplementary  rate  than 
visited  upon  the  individual  jobs.  It  has  just 
been  shown  that  the  wages  factor  is  one  of  the 
most  variable  elements  in  connection  with  a 
group  of  automatic  machines.  When  all  ma- 
chines are  working  full  time  and  things  are  at 
their  condition  of  maximum  efficiency,  each  job 
in  the  case  of  the  five  machines  mentioned 


\^ 


'  11 


v 

I  \ 


!4  J 


iii  ;■ 


;!  i 


r 


108      THE  DISTRIBUTION  OF  EXPENSE  BURDEN 

above  is  receiving  a  debit  of  i  of  the  attendant's 
wages.  When  only  three  of  the  machines  are 
working,  each  job  done  on  those  machines  still 
continues  on  the  new  plan  to  receive  i,  and, 
as  will  readily  be  understood,  the  remaining  i 
falls  into  the  supplementary  rate. 

The  practical  advantages  of  this  are:  (1), . 
the  prime  cost,  being  wholly  composed  of  the 
machine  rate  which  includes  the  wages  factor, 
remains  the  same  imder  all  conditions  of  shop 
efficiency;  and,  (2),  the  unappropriated  charges, 
including  of  course  the  balance  of  unallotted 
wages,  instead  of  being  visited  on  jobs  which 
do  not  deserve  to  suffer,  go  to  swell  the  supple- 
mentary rate  which  is,  as  before  explained,  an 
index  to  the  conditions  of  shop  efficiency. 

In  the  case  of  mixed  shops  where  groups  of 
automatic  machines  are  ranged  alongside  hand- 
operated  machines,  some  little  care  must  be 
taken  in  arranging  the  wages  factor  as  a  com- 
ponent of  the  new  machine  rate.  The  wages  of 
each  operator  in  the  mixed  shop  must  be  divided 
over  such  machines  only  as  he  is  in  the  habit  of 
working.  It  will  be  evident  that  should  a  man 
at  a  different  rate  of  wages  be  put  permanently 
on  the  machines,  the  machine  rate  will  have  to 
be  altered;  but  in  the  case  of  a  temporary  sub- 
stitution due  to  shop  exigencies  this  should  not 


MASS  PRODUCTION  AND  THE  MACHINE  RATE     109 

be  done.  Any  difference  will  be  a  matter  of 
temporary  accommodation,  properly  thrown 
onto  the  supplementary  rate. 

In  the  case  of  a  shop  given  up  entirely  to 
factory  production  proper,  such  for  instance  as 
a  grinding  or  pohshing  room,  the  advantages  of 
the  proposed  method  become  still  more  obvious. 
After  the  ordinary  machine-rate  factors  have 
been  determined,  a  carefully  estimated  average 
wage  rate  is  added  on  to  the  machine  rate,  and 
becomes  part  of  it.  Now  such  average  rate 
is  based,  as  before  explained,  upon  the  largest 
number  of  machines  that  can  be  worked  by  any 
one  operator,  or  in  cases  where  an  operator  has 
assistants  such  wages  are  added  together  and 
then  averaged.  In  any  such  shop  it  frequently 
happens  that  workers  are  graded  rather  by 
length  of  service  than  by  competence.  The 
averaging  plan  gets  rid  of  these  anomalies. 
Where  differences  in  wages  are  not  due  to  differ- 
ences in  work,  it  is  most  desirable  that  the  costs 
should  not  vary  because  a  higher  or  lower-waged 
operative  has  happened  to  be  employed  on  any 
job. 

In  all  these  cases,  the  wages  of  operators 
which  have  been  reduced  to  machine-rate  fac- 
tors are  debited  at  the  end  of  the  month  to  the 
shop  accoimt.    As  this  account  is  credited  with 


1^ 


^i  ill 


^ 


! 


w 


'I 

i 


110      THE  DISTRIBUTION   OF  EXPENSE  BURDEN 

all  the  machine  eammgs,  it  follows  again  that 
the  balance  of  time  not  occupied  to  the  utmost 
efficiency  (as  for  instance  in  the  case  of  three 
only  out  of  five  machines  being  worked)  remains 
uncredited  and  thus  is  left  to  be  dealt  with  in 
the  supplementary  rate. 

The  main  point  of  difference  between  the  new 
and  former  method  may  be  briefly  summarized. 
In  the  case  of  automatic  machines,  or  of  regular 
factory  production,  the  wages  of  operators  are 
treated  as  a  shop  charge,  and  a  factor  is  added 
to  the  new  machine  rate  by  which  such  wages 
are  charged  to  jobs  on  the  basis  of  conditions 
of  highest  efficiency.  A  departure  from  these 
highest  conditions  does  not  reflect  itself  in  the 
No.  1  cost  of  the  job,  but  only  in  a  higher  sup- 
plementary rate  distributed  as  a  general  shop 
charge  by  hourly  burden. 

When  all  the  machines  are  running,  and  con- 
sequently the  conditions  of  maximum  efficiency 
are  fulfilled,  there  will  be  nothing  left  in  the 
shop  account  but  the  really  general  shop  charges, 
such  as  general  foremen's  wages,  and  conse- 
quently the  effect  will  then  be  the  same  as  if 
the  wages  of  each  operator  were  being  distrib- 
uted by  time  sheets  over  the  jobs  he  is  actually 
engaged  upon. 

The  principle  might  be  illustrated  by  saying 
that  each  machine  is  looked  on  as  having  a  little 


t 


BfASS  PRODUCTION  AND  THE  MACHINE  RATE     111 

bit  of  its  operator's  wages  permanently  attached 
to  it.  When  the  machine  is  working  this  frag- 
ment of  wages  is  transferred  to  the  jobs  done, 
but  if  it  is  idle  the  fragment  is  transferred  to 
the  general  shop  expenses,  and  is  distributed 
over  the  work  generally  as  supplementary 
expenditure. 

Reference  has  been  made  to  regular  factory 
operations  which  do  not  need  that  costs  be 
continuously  taken  out.  Where  machines  are 
constantly  employed  on  the  same  article,  or 
process,  say  shtting  steel  pens,  it  is  not  usually 
considered  necessary  to  keep  a  regular  record  of 
production.  Particular  days  are  selected  and 
the  output  of  the  machine  for  that  day  is  taken. 
This,  divided  by  the  nimiber  of  hours  and  multi- 
phed  by  the  machine  rate,  gives  the  No.  1 
cost  for  the  product,  plus,  of  course,  the  num- 
ber of  hours  multipHed  by  the  supplementary 
rate  (hourly  burden)  if  No.  2  or  shop  cost  is 
required.  This  being  done  from  time  to  time 
is  frequently  considered  to  be  sufficient  check 
to  ensure  proper  working.  Whether  it  is  really 
80  or  not  will  depend  largely  on  circumstances, 
obviously. 

In  any  case,  to  work  out  the  figures  required 
at  the  month  end  it  is  necessary  to  keep  for 
each  machine  a  machine  time  table,  showing 
the  hours  during  which  it  has  been  working. 


';i 


* 


I 


«!.:•'  ' 


112     THE  DISTRIBUTION  OT  EXPENSE  BURDEN 

This  is  summarized  at  the  month  end,  and  the 
total  month's  earnings  of  the  machine  credited 
to  the  shop  accoimt.  It  makes  no  difference 
whether  the  costs  per  job  or  per  batch  are 
worked  out  or  left  unextended.  As  long  as 
we  know  the  numbers  of  hours  worked,  the 
supplementary  rate  can  be  found,  and  thus  the 
true  shop  cost  of  any  job,  whether  all  the  jobs 
are  costed  out,  or  only  selected  ones.  By  using 
a  special  form  of  machine  time  table,  and  by 
sending  through  the  work  in  regular  batches  of 
say,  10,000  pieces,  distinguishmg  each  batch 
by  a  letter  as,  A,  B,  C, . . . .  Y,  Z,  etc.,  both  these 
requirements  can  be  met  at  once,  and  the  cost 
of  each  batch  recorded,  even  though  it  is  only 
occasionally  collected  together  in  the  regular 
form  of  a  cost  account.  This  can,  of  course, 
be  done  at  leisure,  without  special  arrange- 
ments. In  many  respects  this  is  an  advantage 
over  the  occasional  watching  of  outputs,  since 
these  tests  nearly  always  become  known  and 
can  thus  be  manipulated  by  a  cunning  operator. 
Space  does  not  permit  in  this  discussion  of 
more  than  the  outlines  of  the  method  being 
developed;  the  presentation  of  actual  forms  and 
accounts  both  for  maugurating  and  working 
the  system  must  be  left  to  another  occasion. 
But  as  concrete  figures  and  examples  give  a 
very  much  clearer  idea  of  what  is  actually 


MASS  PRODUCTION  AND  THE  BIACmNE  RATE     113 

effected  by  the  system  than  any  amount  of 
merely  verbal  argument  or  description,  the 
remainder  of  this  chapter  will  be  devoted  to 
the  presentation  of  an  actual  set  of  results. 
They  relate  to  a  shop  in  which  many  of  the 
machines  are  worked  by  single  operators,  their 
time  being  charged  direct  to  the  job  in  the 
usual  way.  There  are  also  two  groups  of  six 
automatic  machines,  each  group  requiring  an 
operator,  and  the  two  groups  are  in  charge  of  a 
special  overlooker. 

Shop-Charges  Account,  Januabt. 


Debit 

To  interest  on  ma- 
chines   $53.00 

"  Depreciation   on 

machines 63.00 

"  Power 100.00 

"  Wages    on   auto 

machines 75.00 

(2  operators 
and  overlooker) 
"  Process  sundries 

(oil,  etc.) 45.00 

Debit  for  floor " 
burden   5,000  -  250.00 
sq.  ft.@5cts. . 
Supervision 
(general) 100.00 


« 


(( 


Credit 

By  machine   earn- 
ings   $576.00 

Being     total     of 

amount  distributed 

to  jobs  by  means  of 

new  machine  rates 

this     month.     See 

Table  A  of  "Machine 

Time  Made,"  below. 
Undistributed 

balance 1(X).(X) 

(Supplementary 

rate  =  this  amount 

-^  hours  worked,  i.e., 

|M  „  W.0227  per     • 
hour.) 


Total  debit,  $676.00  $676.00 

Total  hours  made  as  per  Table  A  =  4.400. 
Supplementary  rate  this  month  =  2.27  cents  per  hour. 

N.  B.— The  hourly  butden  for  this  shop  on  the  ordinary  average  hourly- 

burden  plan  would  work  out  at  -.-i!!l , —  -  16.4  cents. 

4,400  hrs. 


'II 


h ; 

1 .. 

\ 

ri' 

114     THE  DISTRIBUTION  OF  EXPENSE  BURDEN 


Table   A. 

— Showing   Machine   Time   Made.    Machine 

Earnings 

in  January 

No.  of 
Machine. 

Total  Hotira 
Worked  In 
Month. 

J-- 

Genu 

t 

Remarks. 

1 

200 

4 

8      1 

2 

200 

7 

14 

3 

200 

38 

46 

4 

200 

26 

50 

Hand-operated 

6 

200 

13 

24 

machines.     Wages 

6 

200 

10 

20 

allocated  direct  to 

7 

200 

00 

18 

job  per  time  sheet. 

8 

200 

84 

68 

9 

200 

04 

8 

10 

200 

10 

32       J 

11 

200 

0 

18       1 

12 

200 

0 

18 

Group  1.     Auto 

13 

200 

0 

18 

machines.     Wa^es 

14 

200 

9 

18 

part    of    machine 

15 

200 

0 

18 

rate. 

16 

200 

0 

18       J 

17 

200 

15 

30       1 

18 

200 

15 

30 

Group  2.    Aut  o 

19 

200 

15 

30 

machines.     Wages 

20 

200 

15 

30 

part    of    machine 

21 

200 

15 

30 

rate. 

22 

Totals 

200 
4.400 

15 

30 
$576.00 

A 


The  shop  and  cost  accounts  are  presented, 
first,  during  a  period  in  which  the  shops  were 
full  of  work,  and  secondly,  some  months  later 
when  trade  was  very  quiet.  The  same  job  is 
given  under  the  two  conditions,  and  is  also 
shown  separately  in  the  second  period,  as  an 


MASS  PRODUCTION  AND  THE  MACHINE  RATE     115 

improvement  in  the  method  of  manufacture 
was  made  at  this  time. 

Cost  Statement  op  Job  (Jantjart). 

10  Hours  machine  No.  9  @    4  cents  per  hour $0.40 

6       "  "       "  8  @  34       "      "       " 2  04 

12       "  "       "  17  @  15      "      "       "    1.80 

3       "  "       «  3  @  23       "      "       " 69 

Add.  Total  machine  rates,  $4.93 

Supplementary  rate  @  2.27  cents  per  hour  on  31  hours      .  70 

Total  shop  charges,  $5.63 

10  Hours'  wages  @  31  cents  per  hour $3. 10 

6   "    "    @  10  "   "   "  60 

3   "    "    @  14  "   "   "  42 

Total  wages,   4.12 
Total  No.  2  or  works  cost  of  j  ob,  $9 .  75 

It  will  be  noticed  that  in  this  month  all  the 
machines  made  full  time;  consequently  the 
supplementary  rate  was  very  low,  viz.,  2J  cents 
per  hour.  The  contrast  between  the  average 
hourly-burden  plan  figure,  viz.,  15  cents  per 
hour,  and  the  new  method,  is  very  well  seen  by 
a  glance  at  the  Table  A  of  machines.  We  have 
here  machines  which  are  rated  as  high  as  34 
cents  per  hour,  whilst  others  are  as  low  as  4 
cents,  this  latter  machine  being  a  watchmaker's 
lathe,  operated  by  a  highly  paid  man.  These 
differences  in  the  incidence  of  shop  charges  be- 
ing based  on  real  figures,  it  is  obvious  that  the 
new  method  offers  an  important  advantage  in 


fj 


iM 


-.-li 


116      THE  DISTRIBimON  OF  EXPENSE  BURDEN 

differentiating  such  different  charges  as  4  and 
34  cents  per  hour,  in  place  of  averaging  them  all 
round,  as  the  hourly-burden  plan  does,  on  a 
basis  of  15  cents. 

In  the  cost  statement  it  will  be  noticed  that 
only  three  items  of  wages  figure,  although  there 
are  four  machines  concerned.  This  is  because 
machine  No.  17  is  one  of  the  automatic  machines 
and  the  cost  of  operating  this  is  charged  to  the 
machine  rate,  as  previously  explained  in  this 
article.  When  we  come  to  contrast  this  job-cost 
statement  with  that  for  the  same  job  in  slack 
times,  the  further  advantages  of  the  method  will 
be  seen. 

Shop-Charqbs  Account  (November). 

Debit.  Credit 

To  Interest  on  ma-  By  Machine  earn- 

chine $53.00  ings $292.53 

"  Depreciation    on  As  Table  A 

machine 63 .00        "    Supplementary 

"Power 62.00  rate 305.47 

"  Wages    on    auto  J305J7_  ^erhour 

machines 65.00      Hr8.2,187     ^^^'^^'P^^'^^^^'- 
Cl  operator  and 

overlooker) 
"  Process  sundries 

(oil,  etc.) 25.00 

"  Debit    for    floor 

burden 250.00 

"  Supervision 100.00 

$598.00  $598.00 

Total  hours  made  as  Table  A  =«  2, 187.    Supplementary 

rate  this  month  =  14  cents  per  hour.   Average  hourly  burden 

on  hourly-burden  plan  would  be  ^-r^  »»  27.3  cents  per  hour. 


MASS  PRODUCTION  AND  THE  MACHINE  RATE     117 

Table  A. — Showing  Machine  Time  Made  and  Machinb 

Eabninos  in  November. 


No.  of 
Maohlae. 


1. 

2. 

3. 

4. 

5. 

6. 

7. 

8. 

9. 
10. 
11.. 
12. 
13. 
14. 
16. 
16. 


a 

O-H     . 

.^  k  a 
It  o  o 

{- 

13U 

126 

86 
140 
200 
200 
200 

90 
200 

80 


S  . 

■rW  5 

4  cents. 

7  cents. 
23  cents. 
26  cents. 
12  cents. 
10  cents. 

9  cents. 
34  cents. 

4  cents. 
16  cents. 


$5.20 
8.75 
19.78 
35.00 
24.00 
20.00 
18.00 
30.60 
8.00 
12.80 


Remarks. 


17 

18 

19 

20 

21. 

22 


140 
80 
96 
140 
140 
140 


15  cents. 

16  cents. 
16  cents. 
16  cents. 
15  cents. 
15  cents. 


21.00 
12.00 
14.40 
21.00 
21.00 
21.00 


This  group  was 
idle  andf  operator 
stopped 


Totals..  2187  $292.63 

Cost  Statement  op  Same  Job  (November). 

31  hours'  machine  time  (details  as  before) $4.93 

Supplementary  rate,  31  hours  at  14  cents 4.34 

Total  shop  charges $9.27 

19  hours'  wages  (details  as  before) 4 .  12 


Total  No.  2  or  works  cost  of  job $13.39 

The  month  of  November  was  a  very  bad  one; 
the  factory  was  working  barely  half  tune.    Yet, 


in 

J     t    s 


I 


118      THE  DISTRIBUTION  OF  EXPENSE   BURDEN 

naturally,  the  debits  against  the  shop  were  not 
reduced  in  anything  like  the  same  proportion. 

There  was  in  consequence  a  sharp  rise  in  the 
ratio  of  charges  to  work. 

The  effect  of  this  can  be  seen  in  the  cost 
statement  of  the  job.  The  works  cost  of  this 
has  gone  up  from  $9.75  to  $13.39,  although 
precisely  the  same  machine  time  and  the  same 
amount  of  wages  was  expended  in  the  one 
period  as  in  the  other.  A  glance  at  the  state- 
ment tells  us,  however,  that  the  increased  cost 
is  wholly  comprised  in  the  one  item  of  supple- 
mentary rate,  and  was  not  due,  therefore  to 
removable  causes  as  far  as  this  job  is  concerned. 

Now  on  any  average  distribution  plan, 
whether  by  percentage  on  wages  or  by  aver- 
aged hourly  burden,  this  information  would  be 
lacking.  We  should  see  merely  that  the  debit 
for  expenses  against  that  particular  job,  and  its 
works  cost,  was  higher;  but  why  this  was  so, 
whether  due  to  variation  in  process  or  wholly 
to  increase  in  the  ratio  of  charges,  would  not  be 
ascertainable  without  considerable  investiga- 
tion and  analysis.  Here,  on  the  contrary,  it  is 
seen  at  once  that  the  debit  for  machine  time — 
viz.,  $4.93 — is  the  same  as  usual,  thus  allowing 
us  to  compare  the  debits  due  to  variation  of 


MASS  PRODUCTION  AND  THE  MACHINE  RATE     119 

process  at  different  periods,  quite  irrespective 
of  whether  the  shop  is  busy  or  slack. 

Apart  from  the  greater  precision  and  accuracy 
of  the  method,  this  disentanglement  of  the 
charges  for  work  done  from  the  charges  due  to 
slackness  is  a  very  considerable  gain.  It  is,  in 
fact,  a  step  nearer  the  true  representation  in 
the  accounts  of  what  has  actually  happened  in 
the  shops.  By  bringing  out  all  natural  differ- 
ences to  the  full  instead  of  averaging  them  all 
down,  we  obtain  a  stronger  grasp  of  the  situa- 
tion. 

In  the  following  statement  the  cost  of  this 
job  for  November  has  come  out  at  $11.35 

Cost  Statement  op  Job. 

put  through  in  november,  but  on  an  improved  method. 

10  hours  No.    9  @    4  cents  per  hour $0.40 

•6  hours  No.    2@    7  cents  per  hour 42 

12  hours  No.  17  @  15  cents  per  hour 1.80 

*3  hours  No.    7@    9  cents  per  hour 27 

Total  machine  rate,  $2.89 
Add  supplementary  rate 

31  hours  @  14  cents  per  hour 4.34 

Total  shop  charges,  $7.23 

10  hours'  wages  @  31  cents $3. 10 

6  hours'  wages  @  10  cents 60 

3  hours'  wages  @  14  cents 42 

Total  wages  (same  as  before)  $4.12 

Total  No.  2  or  works  cost,  $11 .35 
*  Altered  process.    Compare  with  former  statements. 


fc 


120      THE  DISTRIBUTION  OP  EXPENSE  BURDEN 

instead  of  $13.39.  The  difference  is  due  to 
an  improvement  in  method  of  working.  The 
important  point  is  that  neither  the  wages  nor 
the  hom^  taken  have  varied;  therefore  on  any 
averaging  system,  whether  on  wages  or  by 
hom*ly  burden,  this  improvement  would  be 
absolutely  lost  sight  of,  inasmuch  as  neither  of 
the  factors  on  which  they  rest  has  happened 
to  vary. 

But  a  glance  at  the  job  in  the  form  presented 
here  is  sufficient  to  show  what  has  happened. 
Wages  are  the  same,  supplementary  rate  is  the 
same,  but  the  debit  for  machine  rate  is  less. 
This  leads  us  at  once  to  the  nature  of  the  change 
which  has  resulted  in  an  economy.  It  is  that 
in  two  cases,  a  less  heavily  rated  class  of  machine 
has  been  substituted  for  those  in  use  before. 
Machines  at  7  and  9  cents  per  hour  have  super- 
seded machines  at  34  and  23  cents  per  hour. 

On  no  method  but  a  machine-rate  method 
can  differences  of  this  important  class  be  made 
visible,  and  no  machine-rate  method  is  in  itself 
complete  or  advisable,  unless  accompanied  by 
the  device  of  the  supplementary  rate  to  absorb 
and  deal  with  the  idle  time.  But  with  these 
combined,  the  resulting  method  is  not  only 
more  accurate,  but  fulfils  functions  which  are 
entirely  missed  in  other  methods. 


MASS  PRODUCTION  AND  THE  MACHINE  RATE      121 

In  the  next  chapter,  (which  will  conclude  this 
discussion,)  the  question  of  general  estabUsh- 
ment  charges,  i.e.,  those  due  to  the  selling  organ- 
ization, will  be  dealt  with,  and  some  remarks 
will  be  offered  on  the  proper  uses  and  digestion 
of  costs  and  estabUshment-charge  accounts. 


* 


^'   1 

1^    * 

P  ■ 

I.'   '. 

!;'  i 

If; 

nil 


|i| 


APPORTIONMENT  OF  OFFICE  AND 
SELLING  EXPENSE. 


I 


i!^' 


Chapter  VT. 

APPORTIONMENT  OF  OFFICE  AND  SELLING 

EXPENSE. 

TN  the  preceding  chapters  the  question  of  shop 
*  or  works  charges  has  alone  been  consid- 
ered. It  has  been  shown  that  an  improvement 
on  the  present  practice  of  averaging  these 
charges  is  possible,  and  that  there  is  no  reason 
why  each  item  of  product  shall  not  be  as  defi- 
nitely connected  with  its  proper  portion  of  such 
charges  as  with  the  corresponding  portion  of 
wages  spent  directly  on  it. 

It  was  explained  in  the  first  chapter  that 
shop  charges  do  not  by  any  means  exhaust 
the  whole  of  the  expense  account.  In  addition 
to  the  charges  actually  incurred  in  production, 
there  is  a  large  section  of  expenses  incurred  in 
advertising,  warehousing,  packing,  transport- 
ing, and  conducting  the  commercial  processes 
incident  to  selhng  the  finished  product.  These 
expenses  should  not  on  any  account  be  mingled 
with  those  due  to  production. 

In  the  case  of  a  concern  of  which  the  works 
is  in  the  country  and  the  commercial  office  in 

ui 


I 


1 


i 


i 


11 


<  n 


126      THE  DISTRIBUTION  OP  EXPENSE  BURDEN 

the  metropolis,  this  division  of  charges  takes 
place  naturally  and  almost  automatically.  We 
need  not  stop  to  discuss  here  the  few  minor 
points  in  which  the  division  is  indistinct;  it  will 
be  sufficient  to  notice  that  there  is  for  the  most 
part  a  broad  and  strongly  marked  natural  dis- 
tinction between  the  two  classes. 

It  has  ah-eady  been  shown  that  the  shop 
charges  have  a  real  relation  to  the  work,  and 
that  all  we  have  to  do  in  their  case  is  not  to 
cover  up  or  average  away  such  real  relation, 
but  rather  to  seek  to  develop  it.  We  have  now 
to  consider  whether  there  is  any  similar  real 
connection  between  the  value  of  finished  prod-* 
uct  and  the  general  establishment  charges. 

It  may  be  stated  at  the  outset  that  there  is 
no  such  connection.  The  cost  of  marketing 
an  article  has  no  ascertainable  relation  to  the 
cost  of  making  it.  The  immediate  inference 
from  this  is  that  in  whatever  way  we  finally 
decide  to  distribute  general  establishment 
charges,  a  more  or  less  arbitrary  basis  of  inci- 
dence must  be  made  use  of.  But  this  does  not 
imply  that  there  is  no  utility  in  discussing  this 
basis  very  fully.  On  the  contrary,  the  cost  of 
selling  requires  as  careful  elaboration  as  the 
cost  of  producing,  inasmuch  as  commercial 
ability  is  more  rare  and  subtle  than  technical 


N 


APPORTIONING  OFFICE  AND  SELLING  EXPENSE  127 

ability,  and  articles  which  are  being  produced 
cheaply  enough  may  fail  to  show  a  profit  owing 
to  waste  in  the  methods  of  finding  a  market  for 
them. 

The  modern  tendency  to  eliminate  the  middle- 
man and  sell  direct  from  the  factory  to  the  con- 
sumer makes  the  question  of  general  estab- 
lishment charges  one  of  growing  importance. 
In  some  trades,  as  for  instance  the  textile  trades, 
where  the  product  is  sold  to  merchants  mostly 
before  manufacture,  orders  being  taken  in  open 
market,  ("on  change,")  the  general  charges 
bear  a  very  small  ratio  to  the  finished  article. 
But  in  proportion  as  the  commercial  side  is 
developed  and  stocks  are  held,  together  with 
a  great  extension  of  advertising,  travelers,  and 
agents,  these  charges  begin  to  loom  large  and 
may  represent  more  than  half  of  the  ultimate 
sale  price.  The  importance  of  knowing  in  such 
case  precisely  what  it  costs  to  sell,  as  well  as 
whatsit  costs  to  make,  cannot  be  denied. 

The  theory  of  general  establishment  charges 
may  be  briefly  stated  as  follows: — Shaving  pro-- 
duced  certain  articles  which  are  found  to  have 
]oost  N.,  we  have  to  spread  over  such  cost  an 
additional  amount.  M.,  which  we  find  repre- 
sents the  cost  of  selling  the  value  N.  at  a  profit. 
Now  the  cost  of  selling  has  not,  as  already 


,* 


i 


128      THE  DISTRIBUTION  OF  EXPENSE  BUBDEN 

remarked,  any  proportionate  relation  to  cost 
of  making  at  all.    And  the  real  diflSculty  of 
basing  the  incidence  of  general  charges  on  shop 
cost  is  that  these  charges  do  not  get  higher  as 
works  cost  gets  higher  in  the  majority  of  cases, 
for  the  increase  in  cost  of  production  is  usually  at 
the  expense  of  profit.    It  is  not  often  that  the 
price  obtained  for  an  article  is  otherwise  than 
ruled  by  the  state  of  the  market.    And  certainly 
accidental  increases  in  production  cost  are  at 
the  expense  of  profit  only  in  almost  every  case. 
If,  therefore,  we  base  the  incidence  of  general 
charges  as  a  mere  percentage  on  wages,  or  on 
works  cost,  we  are  doing  something  which  is 
very  easy  and  simple,  but  which  is  almost  sure 
to  be  very  misleading  in  cases  where  there  are 
more  than  one  or  two  different  classes  of  arti- 
cles concerned.    At  the  same  time,  it  is  evident 
that  some  basis  of  value  must  be  taken  before 
we  can  distribute  at  all.    It  is  not  practicable 
to  isolate  the  expenditure  on  advertising,  travel- 
ing, and  so  forth,  so  as  to  debit  each  piece  with 
the  amount  incurred  on  the  selling  of  it;  we 
have  therefore  to  compromise  the  matter,  and 
compensate  the  faults  of  the  basis  by  a  classifi- 
cation method  which  will  enable  us  to  discrimi- 
nate  between  various  classes  of  products.   Even 
then  there  is  a  choice  between  three  bases  of 


1 


APPORTIONING  OFFICE  AND  SELLING  EXPENSE  129 


value  on  which  the  general  charge  may  be  dis- 
tributed. 

General  charges  may  be  distributed:  1,  on 
wages  cost  only;  2,  on  works  cost;  3,  on  an 
hourly  basis,  according  to  the  number  of  hours 
consumed  in  the  production. 

For  ordinary  manufacturing  purposes,  it  is 
probable  that  the  last  method  has  the  balancef 
of  advantages  in  its  favor.  The  proposal  will 
be  understood  if  it  is  stated  that  the  basis  of 
distribution  is  an  hourly-burden  method.  Also 
the  entirely  arbitrary  nature  of  the  basis  will 
be  strongly  demonstrated.  There  is  obviously 
no  connection  between  selling  expenses  and  the 
jQumber  of  hours  occupied  in  maEh^.  "l^eittier 
is  there  any  connection  between  wages,  or 
prime  cost,  and  the  cost  of  selling.  Many  per- 
sons, however,  are  under  the  impression  that 
there  is.  The  reduction  of  the  basis  to  hours 
instead  of  dollars  or  shillings  will  help  to  dis- 
perse this  impression,  which  is  of  course  with- 
out any  foundation  whatever. 

Having  decided  on  the  basis  for  distribution, 
there  is  next  the  question  of  how  to  compensate 
for  its  arbitrary  character.  Its  only  merit  is 
that  it  provides  a  common  basis  for  distribut- 
ing over  classes  of  articles  which  may  be  very 
varied  indeed,  and  it  has,  of  course,  a  direct 


■^1 


I 'I 


130     THE  DISTRIBUTION  OF  EXPENSE  BURDEN 

ratio  with  the  activity  of  the  shops  during  any 
period  of  which  it  is  required  to  distribute  the 
general  charges.  On  the  other  hand,  in  cases 
where  a  factoring  business  in  addition  to  a 
manufacturing  business  is  done,  or  where  the 
product  includes  heavy  purchases  of  material, 
additional  arrangements  are  necessary  to  deal 
with  these  variations. 

If,  now,  we  regard  a  given  case  in  which  there 
are,  for  example,  three  distinct  products  manu- 
factm-ed  by  the  firm,  one  of  which  is  a  small 
item  made  in  large  quantities,  and  almost  a 
"staple" — that  is,  a  readily  marketable  pro- 
duct depending  on  the  condition  of  the  market 
for  its  sale  and  price  rather  than  on  any  special 
efforts  of  the  commercial  arm  to  push  it — the 
others  being  respectively  an  ordinary  engineer- 
ing device  such  as  a  lathe  or  pump,  fairly  well 
standardized  and  sold  from  catalogue,  and 
finally  a  special  class  of  thing,  such  as  a  crane, 
which  has  to  be  treated  individually,  involving 
a  good  deal  of  staff  time  for  drawings,  measure- 
ments, consultations,  visits,  etc.,  in  each  case — 
if  we  consider  a  case  like  this,  it  will  be  evident 
that  to  treat  each  of  these  classes  alike  in  the 
proportion  of  general  charges  debited  to  it  will 
be  to  do  a  serious  injustice  to  the  more  easily 
sold  things,  to  the  benefit  of  the  less  easily  sold. 


APPORTIONING  OFFICE  AND  SELLING  EXPENSE  131 

And  when  the  question  of  what  class  of  business 
it  pays  best  to  exploit  is  under  consideration, 
this  becomes  a  vital  matter  indeed. 

It  may  perhaps  be  suggested  that  no  system 
of  establishment  charges  is  required  to  inform 
a  practical  man  on  this  point.  And  in  the 
strongly  contrasted  cases  which  have  been  pur- 
posely selected,  this  may  perhaps  be  so.  But 
in  proportion  as  the  difference  between  classes 
becomes  less,  the  problem  becomes  obscure. 
A  shrewd  guess  may  be  made,  and  in  the  absence 
of  actual  knowledge  must  be,  as  to  what  is  the 
most  profitable  class  of  several.  The  whole 
tendency  of  modern  organization  is,  however, 
to  do  away  with  the  necessity  for  guessing  at  all. 

It  is  necessary,  notwithstanding,  to  beware  of 
relying  on  figures  unless  the  conditions  under 
which  they  are  true  are  well  known.  A  mis- 
leading method  is,  of  course,  much  worse  than 
none  at  all.  It  is  for  this  reason  that  the  essen- 
tial falsity  of  averaging  general  charges  all 
round  should  be  clearly  recognized,  just  as  it 
has  been  shown  that  the  method  is  false  for 
shop  charges.  And  when,  as  is  usually  done, 
both  these  classes  of  charge  are  liunped  together 
and  averaged  over  the  work  without  any  differ- 
entiation at  all,  it  is  diflicult  to  avoid  the  con- 
clusion that  the  practice  is  a  dangerous  one. 


^ 


V 


[V. 


1 


■I  .-• 


i 


132     THU  DISTRIBUTION  OF  EXPENSE  BURDEN 

This  caution  is  necessary  at  the  point  we  have 
reached  in  the  discussion  of  methods  of  dealing 
with  general  estabUshment  charges.  It  is  not 
pretended  that  the  system  here  described  is  as 
final  and  accurate  as  the  method  of  deaUng  with 
shop  charges.  These  latter  are  real,  and  their 
connection  with  each  item  of  work  is  also  real. 
But  as  has  been  frankly  admitted  at  the  outset, 
the  connection  of  general  charges  with  work  is 
not  real,  but  entirely  arbitrary  and  conventional 
from  the  very  natiu'e  of  the  elements  concerned. 
All  we  can  hope  to  do  is  to  approximate  the 
figures  to  the  actual  facts,  by  further  artificial 
means.  Therefore  the  proportion  of  general 
establishment  charges  debited  against  any  par- 
ticular order  must  always  be  regarded  with  due 
reservation. 

The  most  practical  method  of  correcting  the 
errors  introduced  by  the  artificiahty  of  the 
basis  of  distribution,  is  by  means  of  classifica- 
tion whereby  the  incidence  which  would  other- 
wise fall  equally  on  each  kind  of  work  is  made  to 
fall  unequally.  A  number  of  classes  are  created, 
the  incidence  in  the  first  of  which  is,  say,  100, 
the  incidence  in  the  second  being  120,  that  in 
the  third  and  fourth  perhaps  150  and  170  respec- 
tively, and  so  on  for  as  many  classes  as  may  be 
foimd  necessary.     Leaving  aside  for  the  mo- 


APPORTIONING  OFFICE  AND  SELLING  EXPENSE  133 

ment  the  considerations  which  determine  in 
what  particular  class  any  given  article  shall 
stand,  it  is  evident  that  if  we  have  a  thousand 
dollars  to  distribute,  the  first  class  will  get  o£f 
lighter  and  the  last  class  will  be  more  heavily 
debited  than  on  an  ordinary  averaging  plan. 
Therefore  if  any  reasonable  means  of  classify- 
ing articles  can  be  devised  which  shall  corre- 
spond as  closely  as  possible  to  the  differences  in 
their  commercial  treatment,  the  arbitrary  char- 
acter of  the  original  basis  will  be  to  a  large  ex- 
tent minimized.  There  still,  however,  remains 
the  objection  which  must  never  be  lost  sight 
of  when  consulting  the  figures,  that  an  undue 
rise  in  production-cost  will  lead  to  a  dispropor- 
tionate absorption  of  general  charges,  in  what- 
ever class  the  article  may  happen  to  be. 

The  process  of  determining  the  classification 
is,  unfortunately,  somewhat  diflicult,  or  at  least 
demands  a  good  deal  of  thought  and  care  at 
the  outset.  Space  will  not  permit  of  its  full 
treatment  here;  only  the  principle  followed  can 
be  detailed.  Every  item  of  general  charges 
must  be  tabulated.  The  average  annual  cost 
of  advertising,  travehng,  drawings,  patterns, 
catalogues,  correspondence  department,  cash- 
iers and  book-keeping,  management,  and  all 
similar  expenditure  must  be  got  out  and  ar- 


•I 


i 


♦  : 


I 


134      THE  DISTRIBUTION  OP  EXPENSE  BURDEN 

ranged  in  columns.  These  are  the  items  of 
which  the  incidence  has  to  be  settled.  Now 
against  these  has  to  be  placed  each  of  the  differ- 
ent classes  of  articles  manufactured,  and  each 
one  of  these  has  to  be  carefully  reviewed  with 
relation  to  each  of  the  items  of  expense. 

Thus,  for  instance,  advertising.  Analysis  of 
the  advertising  expenditure  may  show  that  one 
'^trctelias  practically  no  concern  with  advertis- 
ing. Of  this  class  an  obvious  example  is  repairs 
"to  the  firm's  own  products.  Other  articles,  on 
the  contrary,  may  involve  special  advertising, 
and  should  of  course  be  debited  with  the  whole 
of  such  special  expense.  Catalogues  are  open 
to  similar  analysis.  Such  items,  again,  as  are 
standard  articles  supplied  either  from  stock  or 
from  standard  parts,  involve  much  less  of  the 
expenditure  due  to  correspondence  than  do 
special  jobs.  Repairs,  on  the  other  hand,  al- 
though escaping  the  advertising  debit,  should 
be  visited  heavily  on  the  correspondence  and 
book-keeping  sections,  since  these  small  jobs 
cause  as  much  work  to  these  departments  as 
do  standard  orders  of  fifty  or  a  hundred  times 
their  value.  From  this  brief  description  it 
will  be  seen  that  the  general  establishment 
charges  are  capable  of  a  very  detailed  analysis. 
It  is  true  that  the  element  of  judgment  is  very 


APPORTIONING  OFFICE  AND  SELLING  EXPENSE  135 

strongly  involved  in  this  analysis,  but  there  is  a 
difference  between  judgment  and  mere  guess- 
work. There  is  no  reason  why  a  very  close 
approximation  to  facts  should  not  be  made  at 
this  stage  if  the  work  is  carried  out  by  a  com- 
petent person,  who  has  access  to  all  the  data 
necessary  for  decision. 

The  method  of  working  up  the  analyzeki 
details  into  percentage  figures  on  which  the 
distribution  of  general  charges  is  actually  made 
^will  be  better  understood  from  an  example.  In 
the  following  table  only  three  classes  of  articles 
have  been  taken,  and  only  three  out  of  the  many 
items  of  establishment  charges.  The  principle 
will  be  none  the  less  clear. 

Table  Showinq  Method  of  Apportioning  Diffebent 

Items  of  General  Establishment  Charges  on 

Different  Classes  of  Work. 


Oam. 


Output. 


,1 


l^    s 


1^ 


1*1 


«  s 

lis 

Standard  lathes. .  $100,000  $7,000  $4,800  $1,660  $13,460  13^ 
Special  cranes....  20,000  3,000  200  1,340  4,640  22i 
Repairs 20,000   2,000     2,000  10 


Totals $140,000  $10,000  $5,000  $5,000  $20,000    ♦ 

•  Averaee  peroentace  would  be  14J  i>er  cent. 

The  figures  in  the  expense  columns  of  the 
above  table  are  obtained  by  carefully  consider- 


» 


136     THE  DISTRIBUTION  OP  EXPENSE  BURDEN 

ing  the  items  with  reference  to  the  output. 
Thus,  on  examining  the  advertising  account,  it 
was  found  that  $3,000  was  spent  in  advertising 
special  cranes,  leaving  the  remainder  of  that 
expense  to  fall  upon  the  standard  lathes.  Cata- 
logues, again,  not  containing  more  than  a  men- 
tion of  the  cranes,  were  adjudged  to  be  borne 
almost  entirely  by  the  lathes.  On  the  other 
hand,  when  the  work  and  expenditure  of  the 
correspondence  department  was  reviewed,  it 
seemed  just  to  apportion  the  expense  much  more 
equally  between  the  three  classes.  The  result 
of  these  several  apportionments  having  been 
summarized  for  each  class  and  the  ratio  estab- 
lished between  them  and  the  volume  of  business 
done,  it  is  foimd  that  while  as  might  have  been 
expected  the  standard  lathes  which  form  the 
great  bulk  of  the  output  absorb  very  nearly  the 
average  amount  of  incidence,  viz.,  13 J  per  cent 
instead  of  14J  per  cent,  the  other  classes,  viz., 
cranes  and  repairs,  differ  considerably  from 
the  average,  the  former  taking  nearly  23  per 
cent  and  the  latter  10  per  cent. 

In  distributing  general  charges  each  month, 
effect  is  given  to  these  percentages.  The  total 
expenditure  being  found,  it  is  not  averaged 
indiscriminately  over  the  whole  output  for  that 
month,  but  in  such  a  manner  that  when  all 


APPORTIONING  OFFICE  AND  SELLING  EXPENSE  137 

is  distributed  the  proportion  between  the  vari- 
ous classes  is  maintained.  This  is  done  by  a 
very  simple  calculation,  not  demanding  in  its 
practical  working  anything  more  than  common 
arithmetic.  The  result  obtained  is  decidedly 
instructive.  Assuming  that  the  classification 
has  been  carefully  made,  the  relative  profitable- 
ness of  any  class  of  work  can  be  ascertained. 
And  if  at  any  time  it  is  found  necessary  to  revise 
the  percentage  for  any  class,  this  can  be  done 
without  disturbing  other  classes.  For,  as  will 
be  seen  from  an  examination  of  the  table  above, 
if  the  percentage  of  any  class  is  sUghtly  reduced, 
it  fails  to  absorb  so  large  a  proportion  of  the 
expenses,  which  consequently  fall  more  heavily 
on  all  the  other  classes. 

It  must  not  be  overlooked  that  a  fundamen- 
tal principle  of  the  distribution  is  that  the  debit 
for  general  expenses  shall  be  exactly  cleared  by 
the  total  of  the  allocation  to  classes.  The 
percentages  here  express  merely  the  relations 
between  the  classes,  and  not  any  definite  percent- 
age on  values.  If  one  class  takes  10  per  cent, 
another  15  per  cent,  and  a  third  20  per  cent, 
this  merely  means  that  the  general  expenses, 
whatever  they  are,  are  distributed  on  the  basis 
of  that  relative  difference  between  the  shares 
taken  by  each  class.    It  does  not  mean  that 


'I 


I  1 


138      THE  DISTRIBUTION  OP  EXPENSE  BURDEN 

Class  1  gets  10  per  cent  only  on  its  value,  but 
that  if  Class  1  gets  a  certain  burden,  Class  2 
has  one-and-a-half  times  and  Class  3  twice  as 
heavy  a  burden  in  proportion  to  hours  or  value. 
That  is,  if  Class  1  has  a  burden  of  4  cents  an 
hour,  Class  2  will  have  6  cents  and  Class  3  will 
have  8  cents.  The  actual  burden  will,  of  course, 
depend  on  the  amount  to  be  distributed. 

If  then  we  find  that  any  particular  class  is 
absorbing  expenses  to  such  a  tune  that  there  is 
no  profit  left  when  prime  cost,  shop  charges, 
and  general  charges  have  all  been  debited,  a 
prima-facie  case  is  made  out  for  supposing  that 
this  class  is  not  remunerative  at  the  prices  ob- 
tained. Before  we  can  say  that  this  is  actually 
so,  the  basis  of  classification  must  be  carefully 
examined  to  see  if  it  has  been  assessed  with 
imdue  severity  on  that  article.  This  will  per- 
haps involve  some  trouble,  but  it  is  eminently 
a  case  in  which  it  will  pay  to  spend  trouble. 

Between  the  shop  charges  and  the  general 
charges  there  is,  then,  this  difference:  while  the 
first,  if  properly  arranged  in  the  first  place,  are 
subject  to  no  appeal,  as  they  are  real  figures  and 
do  show  exactly  what  has  taken  place,  the 
general  charges  may  be  looked  on  as  rather  in 
the  nature  of  a  danger  signal  which  gives  warn- 
ing of  a  probable  pitfall,   but  which  may,  if 


APPORTIONING  OFFICE  AND  SELLING  EXPENSE  139 

careful  enquiry  approves,  be  put  on  one  side 
and  its  readings  modified.  It  would  be  better, 
of  course,  if  the  figures  pertaining  to  general 
charges  were  as  real  and  rehable  as  those  of  the 
shop  charges.  But  there  seems  to  be  no  possi- 
ble hope  of  their  being  made  so.  There  is  no 
visible  and  tangible  result  connected  with  con- 
crete things  in  the  case  of  general  charges. 
Nothing  is  produced.  Expenditiu-e  may,  in 
fact,  lead  to  no  result  at  all — nay,  does  often 
lead  to  pure  loss  of  money  and  time.  It  is  this 
vagueness  of  the  general  charges  that  forbids 
our  regarding  them  as  bed-rocks  on  which  we 
can  base  deductions  without  further  enquiry. 
But  there  is  no  excuse  for  not  making  them  as 
useful  as  possible,  reading  them  as  indications 
if  not  as  facts. 

Enough  has,  perhaps,  been  said  about  the 
character  of  these  general  charges  to  empha- 
size the  remarks  which  have  been  made  several 
times  in  the  course  of  these  articles  as  to  the 
infinite  importance  of  separating  them  from 
the  shop  charges.  Mr.  Slater  Lewis's  theory  on 
this  point  is  very  clear  and  distinct,  and  should 
be  studied  by  every  manufacturer  who  cares 
for  acciu*acy  and  clearness  in  place  of  confusion 
and  mixed  results  in  his  accounts.  It  is  not 
too  much  to  say  that  any  system  of  accounts 


V 


1.1  ■ 


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140     THE  DISTRIBXJnON  OF  EXPENSE  BURDEN 

which  lumps  both  classes  of  charge  together 
and  averages  them  all  round  is  entirely  worth- 
less. Far  from  being  an  improvement  on  a 
simple  system  of  prime  cost,  it  is  probable  that 
it  may  easily,  by  inducing  a  false  security,  be 
positively  dangerous  and  worse  than  no  sys- 
tem at  all. 

The  conclusion  of  this  demonstration  has  now 
been  reached.  An  attempt  has  been  made  to 
develop  in  an  orderly  manner  the  method  of 
deahng  in  an  improved  way  with  the  very  dif- 
ficult subject  of  establishment  charges.  En- 
deavor has  been  made  to  show  that  present 
methods  are  not  satisfactory  in  that  they  seek 
to  mingle  elements  which  have  nothing  in  com- 
mon, and  which  are,  on  the  contrary,  naturally 
distinct.  In  particular  it  has  been  siiown  that 
the  old  idea  of  the  machine  rate  was  based  upon 
a  theory  essentially  correct,  but  incomplete.  It 
fulfilled  functions  which  were  seen  to  be  desirable, 
and  which  have  been  altogether  neglected  in  the 
more  modem  methods  that  have  succeeded. 

The  fault  of  the  machine  rate,  or  perhaps  we 
may  say  its  misfortune,  was  that  it  was  born 
and  came  to  maturity  in  the  archaic  ages  of 
cost  accounting,  and  that  it  therefore  sinned 
against  the  most  serious  canons  of  modem 
theory  and  practice,  viz.,  that  whatever  else  is 


APPORTIONING  OFFICE  AND  SELLING  EXPENSE  141 

done,  every  dollar  of  charges  must  he  burdened 
onto  some  item  of  work.  The  machine  rate 
failed  because  in  the  first  place  it  dealt  with 
only  one  or  two  items  of  expense,  usually  inter- 
est and  depreciation  alone,  and  in  the  second 
because  in  the  case  of  idle  time  it  simply  lost 
sight  of  the  charges  which  were  nevertheless 
still  there. 

The  main  feature  of  the  system  proposed,  as 
will  have  been  gathered  by  those  who  have 
followed  these  chapters,  is  that  not  only  do  the 
new  machine  rates  deal  with  nearly  all  items  of 
shop  charges  on  a  natiu*al  basis,  but  by  the 
device  of  the  supplementary  rate  all  the  lost 
time  is  picked  up  and  distributed  separately, 
thereby  leaving  the  significance  of  the  machine- 
rate  figures  unalloyed  by  the  accidental  condi- 
tions of  the  shop  at  any  time.  Further  it  has 
been  shown  that  the  supplementary  rate  forms 
in  itself  a  useful  barometer  of  conditions. 

Although  necessities  of  space  have  prevented 
a  full  discussion  of  the  complex  subject  of  gen- 
eral charges,  enough  has  perhaps  been  said  to 
show  that  the  principle  of  averaging  is  not  the 
best  possible.  It  has  been  demonstrated  that 
a  certain  amount  of  connection  can  be  devel- 
oped, not  between  general  charges  and  indi- 
vidual articles,  but  between  such  charges  and 


I 


M 


142     THE  DISTRIBUTION  OF  EXPENSE  BURDEN 

classes  of  products.  And  while  the  results  are 
not  as  precise  and  indisputable  as  in  the  case  of 
shop  charges,  there  is  still  a  decided  gam  by  ef- 
fecting this  connection  as  far  as  it  can  be  done, 
the  results  being  looked  on  as  in  the  nature 
of  a  guide  or  warning  rather  than  as  positive 
and  definite  information. 

The  whole  tendency  of  what  has  been  said 
is  to  the  effect  that  by  suitable  arrangements  on 
the  lines  proposed,  manufacturers  should  be  in 
a  position  to  get  much  further  into  touch  with 
the  details  of  their  work  than  they  have  any 
chance  of  doing  on  present  methods. 

A  few  final  observations  may  be  offered  on 
the  subject  of  works  accounting  generally. 
Modern  methods  have  taken  their  rise  in  the 
growing  complexity  of  modern  industry.  They, 
like  the  industry  itself,  tend  to  become  more 
complicated  in  proportion  as  the  numbers  of 
their  factors  increase.  The  snare  of  the ' '  simple 
system"  must  therefore  be  avoided.  One  can- 
not calculate  the  weight  of  the  earth  or  the 
distance  of  Uranus  by  means  of  common  arith- 
metic. Nor  can  anyone  represent  the  thousand- 
and-one  interlocked  factors  of  a  modern  factory 
by  means  of  a  double-entry  ledger  and  an 
oflice  boy.  And  just  as  the  whole  science  of 
navigation  hinges  on  higher  mathematics,  so 


Ni 


APPORTIONING  OFFICE  AND  SELLING  EXPENSE   143 

the  management  of  a  considerable  business 
turns  upon  intricate  principles  which  are  the 
horror  of  the  rule-of-thumb  man  and  the  sheet 
anchor  of  the  progressive  man  of  business. 
Now  one  can  traverse  the  Atlantic  in  an  open 
boat  and  without  the  Nautical  Almanac,  but 
it  is  done  more  quickly  and  more  surely  in  the 
Mauretania. 

No  system,  however  good,  will  give  immedi- 
ate results.    It  must  be  established,  and  must 
have  run  smoothly  for  months  and  even  years 
before  the  full  advantages  are  realized.    For 
all  progress  is  made  by  comparing  what  was 
done  today  with  what  was  done  some  time  ago, 
and  this  can  be  done  to  any  purpose  only  when 
the  basis  of  comparison  is  similar.     From  the 
nature  of  the  case,  no  spasmodic  efforts  at  the 
introduction  of  new  methods  are  of  the  smallest 
use.    To  be  of  final  and  real  commercial  and 
technical  value,  records  must  be  continuous 
and  extend  over  various  fluctuating  periods  of 
trade. 

It  will  seem  superfluous  to  many  who  read 
these  pages  to  insist  on  the  necessity  of  connect- 
ing the  establishment  charges  as  closely  with 
costs  as  it  can  possibly  be  done,  yet  the  truth 
is  that  comparatively  few  manufacturers  are 
awake  to  this  necessity.     They  do  not  realize 


11 

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144       THE  DISTRIBUTION  OP  EXPENSE  BURDEN 

that  in  all  industries  it  is  the  narrowing  of  mar- 
gins of  profit,  too  often  to  the  vanishing  point, 
that  has  brought  this  question  to  the  front. 
Fifty  years  ago,  though  there  was  a  need  (as 
evidenced  by  the  tentative  intjpoduction  of 
machine  rates),  there  was  not  a  pressing  and 
imperative  necessity  for  the  manufacturer  to 
look  so  closely  and  minutely  into  what  he  was 
doing.  And  only  the  "coming  men"  feel  that 
necessity  now.  The  older  concerns  will  prob- 
ably never  come  to  that  point,  for  they  will 
have  become  exhausted  in  the  effort  to  find  out 
what  was  wrong  with  them. 


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